American Coastal Insurance Corp (ACIC) 2016 Q2 法說會逐字稿

Greetings and welcome to the UPC Insurance second-quarter financial results conference call. (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. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us. You can find final copy of UPC's earnings release today yet at www.UPCinsurance.com in the investor relations section. You are also welcome to contact our office at 212-836-9606 and we would be happy to send you a copy. In addition, UPC has made this broadcast available on its website.

Before we get started I would like to read the following statement on behalf of the Company. Except with respect to historical information, statements made in this conference call may constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends and 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 US 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 would now like to turn the call over to Mr. John Forney, UPC's Chief Executive Officer. Please go ahead, John.

Thanks, Adam. This is John Forney, President and CEO of UPC Insurance. With me today is Brad Martz, our Chief Financial Officer. We know there is a lot going on in your world right now, so we really appreciate your taking time to join us on the call.

This was a very active quarter for UPC Insurance and one in which we made significant progress towards our goal of becoming the premier provider of property insurance in catastrophe-exposed areas. Here are a few highlights.

We closed on our purchase of Interboro Insurance Company, which brought us a group of talented associates and a foothold in New York, which will be an important state for us. Interboro was profitable in both of its first two months of operation as part of the UPC family.

Organic growth was strong again. The three months of the second quarter were the first, second, and third biggest new production months in our company's history. We wrote over 12,000 new policies every month in the quarter, 85% of them outside Florida, and we ended June with over 400,000 policies in force.

Our book is large. We ended the quarter with almost $200 billion of total insured value, double what it was just two years ago. And our book is also diversified, with business in 12 states and over half of our business outside Florida, no matter how you measure it.

I'm grateful to the over 7,000 independent agents who entrust their customers to us daily and to our amazing sales team led by Deepak Menon.

We are earning this business, not buying it. We ended the quarter with the highest average premium per policy in our non-Florida business in our company's history. In the past year we have taken rate increases in Massachusetts, Rhode Island, North Carolina, and Florida, and are evaluating others. Agents know that our value proposition includes fair pricings, but that we will always put financial stability and rate adequacy first.

Our reinsurance structure plays a big role in providing us financial stability. In this quarter we placed our hurricane reinsurance program, which provides us the greatest amount of protection on both an absolute and a relative basis in the Company's history -- $1.5 billion in coverage to be precise -- and very robust and flexible coverage thanks to the unique structure our partners at TigerRisk have helped us to develop and thanks to the commitment of our reinsurance partners who have grown with us.

This year we also placed part of our reinsurance program in the capital markets, which brought us almost 20 new investors and positioned us to continue to grow our program in future years. Our non-hurricane reinsurance program also helped to defray most of the impact of the very active weather quarter we just experienced and some variation of that strategy will be an integral part of how we operate going forward.

Financially, we also continued to build strength in the quarter. We ended the quarter with almost $1 billion in assets and over $250 million in stockholder's equity. We had to fight hard this quarter for the solid bottom-line results we produced, given the very high frequency of weather-related losses. And that spirit of determination at our company is what I am most pleased about today.

I will stop at this point and turn it over to Brad Martz to talk in more detail about our financial results and look forward to answering questions once Brad has completed his remarks. Brad?

Thank you, John, and hello. I am Brad Martz, CFO of UPC insurance; I'm pleased to review the financial highlights. But before we get to those I would like to remind and encourage everyone to review our press release from August 2 and Form 10-Q that we plan to file on August 9.

The highlights of UPC's second-quarter 2016 include: gross premiums written of $211 million, 30% growth year over year; gross premiums earned $165 million, 36% growth year over year; net income of $9.8 million, or EPS of $0.45 per share, up 87% year over year; an underlying combined ratio of 88.8%, which was down roughly 60 basis points from the same quarter a year ago; book value per share increased to $11.97 per share, up 18%; return on average equity of 14.5%; and last, but not least, we consolidated the accretive results of Interboro Insurance Company which we acquired during the second quarter.

UPC saw continued premium growth during the quarter with total revenue growing 42%, from $85.3 million last year to just under $120 million in the current quarter. Direct premiums written for the second quarter 2016 were derived 52% from Florida, 21% from the Gulf region, 12% from the Southeast, and 15% from the Northeast. Great balance. Florida grew a modest 7% on a direct basis and non-Florida represented 85% of the year-over-year growth in direct written premium.

Interboro Insurance Company contributed approximately $10 million of direct written premium for the months of May and June, which was about 21% of the year-over-year increase. And our total policies in force at June 30 grew to over 414,000, up approximately 45% year over year, with a policy mix of about 45% in Florida and 55% outside of Florida.

UPC's losses increased approximately 40% from $44.6 million last year to $62.6 million in the current quarter. However, our net loss ratio actually declined 70 basis points from 55.5% last year to 54.8% this year. The Company did have approximately $3.7 million of net retained catastrophe losses and $0.5 million of adverse reserve development on prior accident years during the quarter, which added roughly 3.7 points to the net loss ratio.

Excluding the impacts of net retained catastrophe losses and prior-year reserve development, UPC's gross and net underlying loss ratios increased year over year, due primarily to unusually high frequency of weather-related losses outside of Florida during the second quarter.

During the quarter, the Company also saw its non-loss operating expenses increased approximately $10.5 million, or 32% year over year. $4.5 million, or 43%, of that change was driven by policy acquisition costs with the remaining $6 million, or 57%, driven by all other operating expenses. More importantly, UPC saw improvement in its operating efficiency, as reflected in our expense ratios during the current quarter.

The gross expense ratio decreased approximately 80 basis points from 26.9% last year to 26.1% in the current quarter and the net expense ratio declined 2.7 points from 40.4% last year to 37.7% this year. The primary drivers of the expense ratio improvement are attributable to lower policy acquisition costs, primarily agent commissions, which were partially offset by higher amortization expenses, which include sophomore investments and intangible assets related to the Interboro acquisition.

The benefits of additional scale, cost containment initiatives, and lower policy processing costs all played a part in our operating efficiency improvements which are expected to continue over the next several quarters. Our balance sheet remains very healthy as UPC ended the quarter with total assets just under $1 billion and shareholder's equity of approximately $259 million. Our liquidity remained strong with cash and investment holdings of over $0.5 million and our statutory surplus of the combined group, including Interboro, was just under $190 million for the quarter.

With that I would like to now reintroduce John Forney for some closing remarks.

Thank you, Brad. Why don't we open it up for questions at this point and I will have a couple of remarks after we are done taking all the questions? So we are ready for questions.

(Operator Instructions) Elyse Greenspan, Wells Fargo.

Good morning. First, on the cat losses in the quarter, is there any way to break down -- in the release it says from Tropical Storm Colin and other events. And then also you did -- I think I heard that you said that there were losses covered under your reinsurance program in the quarter. So what were the gross catastrophe losses? Can you provide that number as well?

Good morning, Elyse. This is Brad Martz. The gross losses for the quarter were approximately $34 million, so we had roughly -- or year to date we are approximately $34 million, so for the quarter they were close to $19 million. We retained $3.7 million, so ceded was approximately $15 million.

The catastrophe aggregate obviously is playing an integral role in managing some of the volatility. We have utilized a significant chunk of that limit, but we do feel good about our outlook for the balance of the year, the remaining expected loss, the exposure. We feel like we have got plenty of limit left and these estimates and these numbers I'm providing to you include some very conservative IBNR reserve assumptions.

So depending on how you want to estimate the ultimate -- with smaller cat events like that it can be very difficult to estimate that, but we feel like this is conservative and we have got sufficient limit left for the remainder of the year. But we are evaluating it carefully and I hope that answers your question.

But then, in terms of the $3-or-so-million, the $3.7 million of retained cat losses in the quarter, how much of that came from Tropical Storm Colin versus smaller other events?

Roughly half of it was Tropical Storm Colin, the other half was smaller events that did not meet our franchise deductible.

Okay, great. Then how much premiums did Interboro add in the quarter, to the top line?

$10 million.

$10 million, okay.

But that was just for two -- just May and June. We didn't have Interboro for the month of April.

Okay. And would that be kind of a run rate, I guess, if you assume -- if it had been for a full quarter, is $15 million kind of how you see that coming online on a quarterly basis?

Potentially. We obviously -- it is a $50 million book of business in force today. We want to grow it, but there was a little bit of assumed premium in the quarter as it relates to a book of business we assumed from Maidstone Insurance Company, a former affiliate of Interboro. So, yes, I think it is a fair run rate for the balance of the year.

Okay. And then the prior-year adverse development in the quarter, can you just provide more details? I know it was modest; just where that came from.

Then, I know in the past you guys have said that you haven't been impacted by the assignment of benefit like other Florida insurers. I just want to reemphasize is that still the case and just comment on the prior-year development.

Sure, Elyse; this is John Forney. As you noted, the prior-year development that we had was very modest. It was mostly attributable to Florida, but it was a small amount that really is relatively immaterial.

With regard to AOB, I would say that, first of all, AOB impacts everybody in Florida. If you're writing business in Florida, you're going to have some impact from it and we are definitely being impacted by AOB. But, the impact on us is far less than it is on other carriers, as is becoming obvious, for the following reasons.

One, we have a relatively low concentration of business in the AOB hotspots, which are Dade and Broward County. We have very little business down there. We don't do a lot of take-out business. We don't write voluntary business at all in Dade County and so our book of business down there is smaller. That helps shield us from the worst of the AOB phenomenon.

The second thing is we have a very holistic approach to how we deal with AOB in Florida that starts with underwriting and product and forms and continues on to claims and to legal. We have things that we do at each step of that process that is designed to mitigate our AOB issues and it has worked fairly successfully. Again, we are not immune to it, but our holistic approach works.

Third, I will say that our general counsel, Kim Salmon, who before she joined us was an insurance defense litigator in Florida for a number of years, is the industry thought-leader on how to battle AOB. And she has been integral in helping us to make sure we are positioned so that we don't get the worst of that.

And for all of those reasons, and one more I guess I will say obviously is we are diversified outside of Florida so significantly; now with well over half our business coming outside Florida. All those things make AOB an irritant to us, but not a material factor in our results.

I guess I will just add that the development was again minor, $0.5 million. We have just been reluctant to release IBNR reserves on the most recent accident year, which is 2015, so the development is really on the most recent accident year. All prior years are fine, nothing to be concerned of.

Okay, great. And then you said there was higher weather-related frequency in the quarter. Is there any way to at least give us some numbers on how much that added to the underlying loss ratio?

Yes, I mean almost the entire variance. I think, from a non-weather frequency perspective, we did well. Total frequency for the quarter with about 6.4%, non-weather was 3.1%; the balance was cat and weather related. And if we look at historical trends, the non-weather frequency for the quarter was below historical trends and the cat and weather-related cause of losses were well above historical trends, so we feel good about that.

We obviously don't control frequency, but we have responded adequately and I think we have done a good job of managing it and providing -- delivering on the promise to our agents and policyholders.

Then last question, if I may. The Florida growth on -- I know more outside of Florida, but the Florida growth did pick up a little bit in the quarter. Can you just comment on where the growth is stemming from and if that looks like a level you might expect to continue during the balance of this year?

This is John Forney again. Elyse, the growth in Florida is entirely attributable to renewed energy in our sales efforts. We have some new folks that we brought in, both insight salespeople and outside salespeople that are new to the Company that are doing a terrific job.

Our product hasn't changed. Rates are more or less the same. We are just getting after it more out there with our sales team and they are doing a fantastic job. That is where the growth is coming from.

It is fairly balanced throughout the state.

Okay, thank you very much.

Greg Peters, Raymond James.

Good morning and congratulations on the quarter. Just a couple of follow-ups. Can we circle back to the aggregate reinsurance program? I am sorry if I missed it; how much did you say is left in terms of protection?

I didn't say it. I said we have adequate limit remaining based on our view of expected losses for the balance of 2016. That is kind of how we feel, but based on the numbers we have recorded -- we have about 25% of the aggregate limit remaining. We have technically used about 75% of the limit, but that is inclusive of some very conservative ultimate loss projections.

So we feel good about the limit remaining, given the fact that the majority and preponderance of the exposure to that treaty is in the first half of the year.

So I guess the natural questions -- and I sensed it from your answers. The natural question would be as you think about the business for the balance of the year, especially with the large footprint, large and growing footprint outside of Florida, what your thought process is to buying some additional cover before the end of the year.

And then given the success of the program to your benefit this year, I am sure you are having substantive conversations with your reinsurance partners and I'm curious about your perspective on pricing of this program as you think about next year.

Greg, this is John Forney. I will take that. We are evaluating where we are with regard to non-hurricane expected losses the rest of the year. And as Brad said, based on our evaluation so far, we believe that the limit we have left is adequate and that probably purchasing more at this point would not be economically smart on our part.

But we will continue to evaluate it. But if you look at the pattern of losses and the expected loss on our book of business, we think we are in good shape right now, but it is something that is an ongoing evaluation for us.

We have no idea about pricing for renewals on this treaty. As I said, we've changed our treaty a little bit each of the last two years. We may not have the exact same kind of treaty next year for non-hurricane losses and we will start to work on renewal discussions later on in Q3 for that, but we don't have any visibility on that right now.

Okay, fair enough. Then just from a big picture perspective, you are making substantial progress on your target of getting to $1 billion of premium and doing a lot of it outside the state, which is to be applauded. But when I think back to your capital base, I'm just curious about your perspective on where you are from a capital adequacy perspective and how you are thinking about that in terms of the substantive growth that you continue to generate.

We are generating significant capital through our profitable growth, that is number one. Reevaluate capital adequacy continuously and we will address it again this quarter with our Board. We are considering lots of different options for adding capital, should we need it, sometime later this year, but we don't have any definite plans in that regard.

But we are sensitive to that and we are very appreciative of the growth. The fact that the growth, for the most part, has been so profitable helps defray the need for additional external capital.

But you are right; at some point we will need additional external capital. We have looked at lots of different options for how to do that. We have no definite plans at this point as to when that will occur or what form it would take.

Do you have any sort of benchmarks, when you're talking to the rating agencies or the regulatory authorities, that you are sort of mindful of as you continue to grow?

Sure, I mean there are writings ratio targets and risk-based capital targets that we have set forward in terms of measuring and benchmarking our capital adequacy. But those are fairly fluid and flexible, to be honest, because they can be managed very aggressively through just reinsurance alone.

Obviously, we buy a lot of reinsurance. That would be the go-to sort of way to attack both of those items and reduce the required capital on a statutory basis. But if we don't want to do that and we want to look at more permanent forms of capital, we will do that and it will probably be a mixture of debt, equity and reinsurance going forward. No one solution.

Thanks very much for the answers and good luck in your next quarter.

(Operator Instructions) Brenden Stoner, Stoner Equities.

Congratulations on the quarter and keep it up. I just have a couple questions for you regarding your sales growth. I know someone touched on it a little earlier.

Just wanted to get a feel for how you see the rest of the year playing out, if the sales growth momentum could potentially carry through for the rest of the year and specifically in Florida.

We see no reason to think that the sales pace that we have established during the first six months of the year won't continue into the second six months of the year. We have strong momentum in all of our states. Our company is very well regarded by the agent community. We have a great sales team, we have good products, we had competitive pricing, and we should continue to be able to put business on the books at the pace that we are doing.

Excellent, excellent. Can you -- I don't know if you have these available, but do you have the retention or renewal numbers for Florida for the first six months?

Did you say for Florida?

Yes, for Florida.

Yes, hold on a second; Brad has got that.

Year to date, the retention rate in Florida is 93.5% at renewal and 87.2% through the full policy term.

Excellent, wonderful. And then do you also have your cash flow operation numbers for the six months?

I do not have out in front of me. That information will be provided in our 10-Q.

Okay, not a problem. Thanks for answering the questions and, again, congrats on the quarter. Please continue the excellent growth.

[Anthony Tue], KBW.

Good morning. Thank you for taking my questions. What drove acquisition ratio lower this quarter? Was there any kind of one-time events that may have affected the numbers?

No, a lot of it is managing our acquisition costs more aggressively. Obviously, we're making some headway on improving the operating efficiency of the Company and that entails fine-tuning of commission programs. It involves migrating business off of legacy platforms, which is a variable cost included in policy acquisition cost, to our brand-new platform, which is a fixed cost basically embedded in G&A through software amortization. So those are the two primary drivers.

Great. Thanks, that was helpful. Sorry if I may have missed this earlier, but can you talk a little bit about how there were cat losses during the quarter? We had assumed your aggregate cover would absorb most of everything and given that you hit your retentions in the first quarter.

I don't think we have much to add. There were 14 separate events that we evaluated as cat or that at least met our franchise deductible, so it was very active, a lot of frequency. But I don't think we have anything to add.

Lastly, have you adopted Citizens new policy language relating to the assignment of benefits? And if not, do you plan to do so in the near term?

We have adopted it; it has been approved. Effective for new business September 1 and for renewals on October 1.

Great, thanks. I will get back in the queue.

We'd now like to turn the call back over to management for closing remarks.

Thank you. The Olympics start this weekend in Rio, but there won't be a better story coming out of the Olympics than the one about the US athlete who is not going. I want to tell it to you briefly because it illustrates some things that I think you should know about UPC Insurance.

At last month's US track and field Olympic trials Kendra Harrison was the favorite in the 100-meter women's high hurdles, but she had a bad race and she finished in sixth place, so she is not going to the Olympics. After the race she didn't make any excuses; she just got back to work. Two weeks later, in a race against all the women who are going to the Olympics, she not only won the race, but she broke a world record that had stood for 28 years.

Kendra Harrison's performance and her actions epitomize the qualities that we talk about all the time at UPC insurance: accountability, resilience, persistence. I see those character traits every single day in our people.

And so, for our investors, you should know our company will always show up, every single day. We are going to have our good days and our bad days, but when we have bad days we are going to get back up and we are going to persist. We are willing to hold ourselves accountable and we will hold ourselves accountable to you for producing great value over a long period of time.

That is how you build something great and that is the kind of company that we are building at UPC Insurance. We really appreciate everybody's time today and your support for our company. Thanks, everybody.

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