American Coastal Insurance Corp (ACIC) 2016 Q4 法說會逐字稿

Greetings and welcome to the UPC Insurance fourth quarter and year-ended December 31, 2016 conference call. At this time all participants are in a listen-only mode. The question-and-answer session will follow the formal before the presentation.

(Operator Instructions)

I would now like to turn the conference over to your host, Mr. Adam Prior of the Equity Group. Thank you. You may begin.

Thank you, and good morning, everyone. Thanks for joining us. You can find copies of UPC's earnings release today 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 Insurance 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 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 product of the Company and its subsidiaries. Actual results from UPC may differ materially from those 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 the new information, future developments or otherwise.

With that, I'd 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. On behalf of everyone at UPC we appreciate your taking time to join us on the call.

We are not happy to post the bottom line financial results we did for Q4 and the full-year of 2016. Absorbing over $55 million of retained cat losses representing over 8 gross margin points, plus another 3 or 4 points from deterioration in the non-cat environment in Florida, left us with scant profits for the year.

To look on the bright side, and I always do, to be able to experience 11 or 12 points of unexpected margin erosion and still turn a profit is a pretty fair accomplishment. We will take it, especially since we know that the poor bottom-line results mask many underlying accomplishments in 2016. It set us up for greater success and resiliency in the future.

Here are just a few to keep in mind. First, organic growth. In 2016 we wrote over 135,000 new policies, meaning that almost 30% of our policies in force at the end of 2016 were written during that year. Our retention ratios have stayed over 90% in almost all our states and the Business is seasoning well. In 2016 all our regions were profitable ex-cat, and our gross non-cat loss ratio outside Florida was well below the industry averages in each state.

Second, our M&A activity augmented our organic growth and prepared us for a transformational 2017. It seems like a long time ago but we closed our acquisition of Interboro less than one year ago.

As we expected in our Interboro brought a well underwritten book to business, stellar relationships with New York brokers, and some talented professionals. We earned a profit at Interboro every month that we owned it in 2016 and had very solid full-year results. With the pending launch of the UPC 1.0 product in New York, we expect to grow the business in 2017.

Even more exciting on the M&A front is our pending merger with American Coastal. We now have all required approvals except New York, and we know that the New York BFS is making good progress on their review.

We still expect to close this quarter. Once we do, we expect to see the enhanced margins, accretive returns and diversification of growth opportunities, which we highlighted when announcing the deal to commence immediately. As one concrete example, with American Coastal as part of the UPC group, we could have experienced a year like the one that just ended meaning a full cat retention and a full kitty cat retention and still have earned double-digit returns on equity, something our Company on its own could not do this past year.

Third, capital management. In Q4 of 2016 we raised capital on very attractive and flexible terms. $30 million of 5 3/4% 10 -year debt with no pre-penalty was a good deal, especially when considered in light of what other market participants were able to achieve. Coupled with our first ever external quota share, which we also put on the books in Q4, our Company is in a strong capital position and ended the year with improved statutory capital and RBC ratios despite the cat losses we sustained.

We entered 2017 with a strong team. It is building a Company that can produce excellent and sustainable results for our stakeholders for many years to come. 2016 offered its share of challenges but we have persevered and are stronger for them. As we continue to diversify and gain scale through the organic growth and M&A activities that we have underway, our results will become more resistant to some of the forces that impacted us in 2016.

As I said before, we're on a journey up a mountain, and sometimes that means traversing a bit before you resume your upward path. We are confident in our strategy and determine to move forward in 2017.

At this point I would like to turn it over to Brad Martz to discuss our financial results in more detail. Brad?

Thank you, John, and hello. I'm Brad Martz, the CFO of UPC Insurance and 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 February 20 and form 10-K that we plan to file within the next couple of weeks.

The highlights for UPC's fourth quarter 2016 included gross premiums written of $167 million, 16% growth year-over-year; gross premiums earned of $182.2 million, up 31% from last year. Net retained catastrophe losses of $32 million, compared to just $3 million a year ago. A net loss of $10.5 million or loss per share of $0.49, despite the almost $0.93 per share loss stemming from catastrophes. Our underlying combined ratio was 90.2% and book value per share was $11.15.

UPC saw continued premium growth during the quarter. Total revenues grew 31% from roughly $100 million last year to $131.4 million in the current quarter. Direct premiums written for the quarter were derived 42% from Florida, 25% from the Gulf region, 21% from the Northeast and 12% from the Southeast. Fairly balanced growth.

Florida grew 11% on a direct basis year-over-year, and outside of Florida was up 46% year-over-year and represented 82% of the overall growth in direct premiums written. Investment income increased 16.3%, consistent with a written premium. And other revenues jumped 105% a quarter due to the ceding commission income earned.

Total policies in force at year-end grew to just under 452,000, up roughly 30%. With our policy mix gained 41% inside of Florida and 59% outside of Florida. Total insured value increased to approximately $210 billion at year-end, with 64% of our property exposure now outside of Florida.

UPC's fourth-quarter losses increased 114% from $46.1 million last year, to $98.7 million in 2016. Our Q4 net loss ratio increased over 21 points from 33.1% last year to 54.2% in the quarter. However, included in those results were approximately $32 million of net retained catastrophe losses and $74.4 million of adverse reserve development on prior accent years during the quarter, which added roughly 32.5 points to the net loss ratio.

The catastrophe losses were mostly from Hurricane Matthew, which was previously disclosed, and exhausted our $30 million first event retention for named wind storms. The adverse reserve development was driven primarily from accident year 2015 losses in Florida, for which the Company decided to further strengthen its reserves at year-end to curb the effect of further development in future periods. Excluding the impact of net retained cat losses and prior reserve develop, UPC's underlying loss ratio increased just under 1 point year-over-year, due primarily to higher severity from water, weather and fire losses as well as efforts to improve overall case reserve adequacy.

During the quarter the Company saw non-loss operating expenses increase approximately $16.5 million or 49% year-over-year, $10.3 million or 63% of the change was driven by policy acquisition costs consistent with UPC's revenue growth and changing mix of business, where acquisition costs are higher outside of Florida. The other $6.2 million, or 37%, of the change was driven by all other operating expenses which were primarily due to amortization and tangible assets for Interboro, professional fees related to our pending merger with American Coastal, prior salary expenses driven by our initiative to shift claims adjudication work away from independent adjusters back to UPC Associates and by increased assessment expense, including an assessment from the North Carolina JUA as a result of hurricane Matthew. This resulted in our gross expense ratio increasing 3.3 points to 27.4% in the current quarter.

The net expense ratio increased slightly more due to the impact of the $9.9 million of earned premiums seated onto the Company's new 20% quota share reinsurance treaty which incepted December 1, 2016. Our balance sheet remains solid despite the $32 million of cat losses and $11 million change in net unrealized losses during the quarter.

UPC ended the year with total assets of just under $1 billion and shareholders equity of approximately $241 million. Our liquidity was strong with cash investment holdings of approximately $679 million, our notes payable increased during the fourth quarter from the Company's previously announced $30 million borrowing completed in December to strengthen the statutory capital and surplus of our insurance affiliates required to support UPC's tremendous organic growth rate. The combined statutory circles of the group at year-end was approximately $220 million.

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

Thanks Brad. Operator I think we would like to open up the call for any questions at this point.

(Operator Instructions)

Our first question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, good morning. I was hoping to first spend some time on the adverse development in the quarter. I know you guys saw about $6 million in the third quarter for what seems like similar water-related claims within Florida. Just what emerged in the fourth quarter, if you could provide more color and why you think from here we won't see any future development on, for 2015?

What we did -- Elyse, this is John Forney, I'll start and Brad can chime in where I fall short here. So we did an exhaustive review year end of our reserve status, keeping in mind that our estimate for the 2015 reserves in Florida at the end of 2015, and our outside actuaries estimate, turned out to be short of what actually transpired during the year. And so we wanted to try to make sure we had it right going into the end of this year.

So we have a very strong internal actuarial team, and we tasked them to look at it with as conservative an eye as they could. We have external actuaries that give our opinion, and we hired a third external actuary to come in and give a second look at what we were doing, just to try to make sure that all the trends were being captured and that we could try to put this thing to rest and book the right number for those reserves. And that's what we did.

As Brad said, it's driven primarily by Florida 2015, and it's driven primarily by two counties in Florida, Miami Dade and Broward, where our non-cat loss ratio in those two counties is over 65% gross loss ratio compared to low 30%s in the rest of the state of Florida. So, the same kind of book of business, but a loss ratio that's twice as high; that's indicative of some kind of systemic problem going on down there and we want to make sure that we are minimizing it.

We are doing that by a few different things. As I think I mentioned last quarter, we don't write any new business down there, we did not do any multi-peril takeouts at all, we are non-renewing in accordance with statutory guidelines what we can non-renew and it's only about 5% of our book of business overall, thank goodness, because even with that, when you have loss ratios that high, it drives several points to your overall Company, even if it's that small of an amount.

We are taking a bunch of steps to try to make sure that we are fighting the good fight down there and minimizing what we can minimize. But market forces are pretty extraordinary right now in that part of the world, so we're trying to reserve against it and keep it under control that way.

And so, there was no -- in the Q4, was there any kind of development on business written in 2016 the first three quarters of the year?

There's always development every quarter; it's just a question of whether or not that development exceeds what you expected. So, yes, there is development on all prior accident quarters, every quarter.

But we significantly strengthened our case reserves as well during the quarter, and really during the whole second half of the year, under the leadership of our new claims team, led by Scott St. John, that came in, in the second half of the year. And it really tried to be very aggressive in getting files closed quickly or getting them reviewed quickly, and booking to the ultimate very quickly.

And I don't have the metrics right in front of me, Elyse. We would be happy to share with you offline.

But we've got very -- much stronger case reserves per policy than we had previously. Especially in Florida, we are trying to book to what we think the ultimate is going to be. And as I said, last year the ultimate turned out to be much higher than we had anticipated or our actuaries had anticipated, and we're trying to get in front of that this time.

Elyse, I can share some of the statistics, if you'd like. Just for an example, our average case year over year is up about 10%; our average paid up about 3%; but average severity is up about 16%. When you look at overall non-cat loss costs, they increased about 57% year over year. But reserves, total reserves increased about 83.4%, so -- and we kept IBNR pretty much consistent as a percentage of total reserves. So, the IBNR was just under, roughly 41% of the total, about $57.4 million at year end; that was consistent as a percentage basis as last year, but again, the overall change being up at a rate much higher than the change in non-cat losses incurred.

Okay. And then you guys -- you did see some growth within Florida in the quarter, just tying back to some of your prior comments, John. Is it safe to assume, I guess within Miami-Dade and Broward and these counties that are obviously running with these really high loss ratios, that business declined? Is there any way to tell us how much that was down in the quarter and the full year? Just more color on where the growth within Florida was coming from in the quarter.

Broward, Miami-Dade is the segment of our book that we isolate and review very carefully because it performs very differently than the rest of our portfolio. To give you a few statistics relative to that county, that one county is hurting us for sure, average severity year over year was up 40%, our average case reserves up 16%, average paids up 15%, and our pure premium, which is your frequency times your severity, was up 27% year over year.

Okay. And then, in terms of the expenses (multiple speakers).

Elyse, if we just can finish the thought, we don't have the numbers right in front of us as to the shrinkage in the business down there, but it is going down and will continue as some of these other initiatives that we have go into place. We will get you that information.

The growth in Florida is not coming from Dade or Broward at all. And we are doing our best to avoid that until there's some kind of a solution that's going to make a dent in what is obviously a very significant problem down there.

So, growth in Florida is coming from other areas. Our experience has been, if not has been much, much better and certainly still profitable business everywhere else in Florida.

So as you guys think about the underlying loss ratio and the profile of the book ex-American Coastal, you ended -- 2016 was about a 49.4%. So was your expectation -- how do you think about the loss profile of the book for 2017?

Our plans are to show some improvement in that underlying result. We do think there are other factors, weather-related, non-recurring factors, both from an operating performance perspective and a loss trend perspective, that should help us see some improvement year over year.

Okay. And then one last question: You pointed to some American Coastal fees in the quarter, and there was some assessments from North Carolina. How much I guess of your expense base in the Q4 would you say was one-time, just if you have that number in millions?

I think there were two things in Q4. There was all those one-time things, which were well over $1 million that are non-recurring. You also had amortization of Interboro intangibles, which is not comparable to the prior quarter, which is recurring but it's a non-cash item that we hadn't had before.

And if you look back at the Q4 gross loss ratio, that quarter was really an outlier on the low side. All other quarters prior to that have been 26%, 27%; that was, what was it, 24% or something like that. So you had a really an outlier comp on the low side, and we had several non-recurring and/or non-cash things in the expense ratio this side. But if you look at the year-over-year, the full-year expense ratio, there is not deterioration in the expense ratio at all.

I was just thinking about in terms of modeling for the Q1 and going forward, what to back out from the Q4 number.

We are not done with American Coastal yet, so we're still incurring fees until that deal closes. The clock's still running on the professionals that are involved in that. So we will continue to have some fees from American Coastal until that professional fees related to lawyers and accountants and bankers and all that stuff, until it gets closed. So, don't take those out of your model just yet. Hopefully we will be closed this quarter.

Okay. That's great. Thanks, guys.

Our next question comes from the line of Arash Soleimani with KBW.

Thanks. Good morning. Just building off the question on the development, that Elyse had, are lawsuits increasing year over year? Can you maybe talk about how you're seeing the AOB environment shift 4Q 2016 versus 4Q 2015, and if it's getting better or worse or just remaining stable in 1Q 2017?

Lawsuits definitely increased year over year, 2015 to 2016, and our lawsuit experience is 90% plus in Florida, even though only 40% of our policies are in Florida. So, it's a Florida-driven, AOB-driven environment, and you see sometimes multiple lawsuits on the same claim from different parties that think they have a standing to sue. Sometimes they do, sometimes they don't, but it doesn't stop them from suing.

So, yes, the environment is pretty robust right now in terms of that litigation-for-profit industry sub -- a cottage industry that's developed in Florida and they're going full steam ahead. I don't know that you can say there is a decline in it overall. We're trying to do the best we can to minimize it for our Company, and we have some legal strategies that have worked for us in certain cases. We had a case dismissed just this week with prejudice by a judge in the Tri-County area in South Florida from a contractor that did not have standing to sue us and tried it anyway.

We are trying to fight the good fight, but I would not want to comment that systemically we're seeing a decline in AOB and related litigation activity. I don't think that's the case. I think every company has got to fight its own fight on its own terms and try to fight the machine.

Thanks, that makes sense. I guess along those same lines, just given that there was the adverse in 3Q and now in 4Q, it looks like things were a bit worse on the AOB side than previously expected. What does that imply for the underlying loss ratio on a current accident year basis? Should we think about it being higher going forward, just given what we learned or what the actuaries learned in Q4? And does that imply that it needs to be booked higher going forward on an accident year basis?

We definitely book our 2016 Florida, specifically Dade and Broward, expectations significantly higher than we would have a year ago. And that's, as I said, even though it's a small part of our book, that flows through the entire expected Florida loss ratio and, therefore, into the Company's loss ratio.

So, yes, no one likes to -- we try to do the reserves in an intellectually honest way every single time. And our actuaries obviously do, too; they sign an opinion. And last year we were both mistaken on what that loss ratio was going to be. That's embarrassing and we don't want to repeat that. We all try to take into account what we didn't take into account last year and what we missed and how we could do a better job this year, but that definitely means more conservative estimates.

Thanks for that, and I guess, on the quota share reinsurance that you incepted on December 1, 2016, who are the reinsurers on that program?

Nephila and Greenlight.

Thanks. And it looks like the other revenue uptick is from ceding commission. I guess my question there is why -- should that be offsetting expenses or why is it hitting revenue rather than being an expense offset in this scenario?

Well, it is on a statutory basis; it's a contra expense offsetting your underwriting expenses, but for GAAP we are classifying it as a revenue item.

Okay. I think you touched on this with Elyse a bit on the expense ratio, but I guess I'm just trying to think, if we have the new systems, I guess the in-sourcing of the systems, and then I think the idea there is, going forward as more states get rolled on that, the expense ratio would decline year over year. So, is the point that if you do strip out the Interboro amortization, if you do strip out the North Carolina fees and the American Coastal fees that we are seeing a year-over-year decline in the gross expense ratio? Is that a fair statement?

I think it'd be closer to in line. I don't know if we can say definitively here and now that there was a decline year over year. On a net basis -- as more and more of our business is written outside of Florida, it's going to be more important obviously to measure it on a net basis than on a gross. Gross is a pure measure, of course.

But we're getting reinsurance cost savings outside of Florida to offset those higher acquisition costs in pack, so looking at it on a net basis probably makes more sense. And for the full year, you can see no change. And obviously then if you strip out some of the non-recurring, yes, I would think on a net basis the net expense ratio did, in fact, decline.

And we expect that to continue.

Okay. And do you have the exact dollar amount for the North Carolina assessment?

The North Carolina assessment for us was about $450,000. We had other assessments in the quarter as well; there was some clean-up New York stuff from Interboro, so we had a total of something like $750,000 of assessments during the quarter, $450,000 was from North Carolina JUA.

Okay. And I know Florida increased year-over-year written premiums on a direct basis, but it looks like on a gross basis it declined about 10%. Is that just basically all Broward and Dade related?

Well, and lack of takeout; you had assumed premium in the quarter last year that we did not have this year.

Right, but I guess wouldn't the takeouts last year just flow into direct this year as they renew, or -- ?

Yes, but obviously there is significant opt out, there's mid-term cancellations and other things. So you're not going to get the full benefit of the assumed written last year in direct in the current [year].

Okay, thanks. And my very last question, in terms of weather year to date, is there anything that you're aware of now that could be hitting 1Q 2017 results?

We have had cat losses, both in the month of January and in February. I think everyone is probably aware of some of the foul weather that's occurred so far in Q1, and we have incurred about $4 million of catastrophe losses through today's date in Q1 that we do expect that to develop some. And it's budgeted for; it's part of our annual operating plan.

Okay, great. Thank you very much for the answers.

Our next question comes from the line of Ron Bobman with Capital Returns.

Thanks. I never thought I'd get called after Elyse's eight questions. They were good questions; I'm teasing more than anything else.

I have more follow-up on the adverse development, in particularly the case reserve setting. And I recognize the backdrop of this is, I call it, sort of unjust, this whole AOB phenomena. But nonetheless, getting these case reserves is really problematic, obviously for you and everybody, given that we have now sequential quarters of additions on the 2015 year. Can you provide some metrics?

I think you touched on some severity figures, but could you go over those or maybe add to them some metrics on the 2015 sort of case reserve amounts that you set for water claims, whether it's Tri-County, whether it's statewide, how those case levels that you were initially setting changed as of the end of 2015, and then how you had to increase them again, and how that's affecting your initial case estimates for water claims that are coming in? I'm trying to get some idea, obviously, as to how the current case estimates on newly reported claims are being established as compared to where you started setting them, and then how you had to adjust them? Thanks.

Ron, this is John Forney. I don't know that we're going to be able to give you an algorithm that answers that question about how our case reserve establishment has changed, other than to say it's changed. And we look at our past experience in trying to judge how much a newly filed claim is going to cost us. And Scott St. John and his team have now been here several months, and have seen the evolution of that, and are trying to be very proactive in making sure we do all the proper file handling within the first 30 days and get the case reserve book to what we think the ultimate is going to be within that first month.

And some of the most striking statistics I had seen recently were on just what our track record was for being more aggressive in outreach and getting claims adjusted quickly, and getting the case reserve set at what we think the ultimate is going to be more quickly compared to six or nine months ago when there were things that sat there at an auto reserve for quite a long period of time. That's just not happening anymore. And we use our experience to try to book case reserves that are much more robust.

As Brad said, our reserves are up 80%-something year over year, but IBNR is still about 40% of our total reserves. That means our case reserves are up significantly more than our premium growth, than our claims filed, than our losses filed, 30 points more. So the numbers are playing out in what we're seeing in reserve conservatism, but we don't have a specific algorithm that says, from now on, a water claim in Dade and Broward is $16,000 initial reserve as opposed to $12,000. It's just not that mechanical.

In all due respect, I really think you need to provide -- I mean, this is a recurring problem. Again, I'm not assigning blame here. It's the environment that you're within. But given the fact that you're having to constantly readjust, I think you have to provide a metric to your shareholders, as to the magnitude of the increase that you're taking because how can we have confidence that the in-bound claims that are coming into the claims department now are being more conservatively accrued for than they were 24 months ago?

I'm not looking, and I'm not asking you to sacrifice your competitive position or your litigation position; I don't want that. But I think you have to provide more metrics to us, rather than sort of anecdotal or more macro, balance-sheet level IBNR growth amounts. And so I'd really ask you to think long and hard about that, again, limited by not trying to sacrifice your litigation position with counterparties. So, thanks, and best of luck on the closing of the transaction.

Thanks, Ron. I would just say that's a fair comment and we will look at doing that, and we don't take it personally if you want to assign blame either; that's your right to do it. It's our obligation to try to make sure we are providing disclosure to shareholders that enables them to understand what's going on at the Company, so we will take a look at that and see if we can get some metrics out there that give you the information you're looking for.

Thanks.

Thank you. Our next question comes from the line of Matt Carletti with JMP Securities.

Good morning. Just a couple questions, one following up on Ron's line of questioning, and I would echo his request for more information there. I think it would really help us understand the situation better.

Can you give us, what was total PIF count at year end, and what was total PIF count in Broward and Dade combined?

Total policies in force were 451,386, and in Broward/Miami-Dade it's about 24,000.

Okay. Great. And then what does pricing look like for your book specifically in Miami-Dade right now? What actions have you taken in response, alongside the reserving changes?

Premiums are flat year over year. We have an indication today that will be filed here in the next couple weeks, probably to be effective no later than 07/01, so that's indicating some very significant rate changes for that segment of our book. The overall is around 9%, plus 9%, but it will be substantially higher in these problematic territories.

Got you. And then you said year over year, premiums are flat. Was pricing relatively flat, or premiums flat and pricing's up and policy is down?

Pricing meaning average premiums, so average premium per policy was roughly flat.

Okay, great. And then last question, if you can, provide a little color on the competitive position of American Coastal? There has been some I guess news in the market, not a ton, but here and there about some new entrants into the commercial residential market, some from the ENS, some from more traditional personal residential competitors. Are they seeing anything yet? Is that a concern? Is pricing coming under pressure as more people come into the market, or is it more just PR and you're not seeing it at the ground level?

I think there's definitely been more competition in the commercial residential admitted market space in Florida than there had been previously. And if you look at the track record of profitability that American Coastal had established, and dominant market position that they had established for a number of years, it's understandable why people would want to compete in that space.

And so, yes, there has been pressure as others have sought to undercut American Coastal's price, sometimes significantly. And American Coastal has -- one of the reasons we love that company is they have very good market relationships, and very sophisticated underwriting and pricing algorithms that enable them to understand the total cost of ownership, if you will, of one of these policies, including specific reinsurance costs.

And so they have been able to navigate through this, losing really only the policies that they were okay losing at the prices that they were being taken at, meaning that those policies at those prices are probably not going to be sustainable in the long run. And we are starting to see some flagging enthusiasm of some of those that have sought to significantly undercut the price. And American Coastal is coming out of this cycle still in a very good position, ended up with a very good 2016 with relatively small losses from Matthew and good bottom-line profit. But we really admire the way that they've fought through this era, and it looks like they are in good shape coming out of it.

Okay, so would I be correct to assume that -- their results have been pretty stellar in recent periods, particularly if you take cats out, all of the perils core loss ratio. Would it be fair to assume that going forward that might creep up a bit? That the loss ratios might not be -- they would still be really good but maybe not quite as good as they have been in the past couple of years, given that competitive dynamic and what you are describing with them, giving price where they can give price but drawing the line when they need to draw the line?

I think a bit is the operative term that you use there. You might see a bit of a creep, but their year-end results, that we've had a preview of, are very impressive from that standpoint actually.

Great. Wonderful. Thank you for the answers and best of luck.

Our next question comes from the line of Brenden Stoner with Stoner Equities.

Thanks for taking my call, gentlemen. I just wanted to talk about a little bit of the trends you're seeing outside of Florida with your pricing? A little bit of discussion about the competition and your markets outside of Florida?

Sure. I think we've said before on these calls that every state has a unique competitive dynamic, and so it's hard to generalize on the competitive environment in Texas versus the competitive environment in Massachusetts because they really are state specific.

As I mentioned in my opening remarks, we are really pleased with the results that we have been able to produce in virtually all of our states in terms of non-cat loss ratios that have been lower than we budgeted and planned and going into all of these states, our retention has been high and we have been able to write (technical difficulty) we're not the lowest priced alternative if any of those [places]. Q4, we went over $100 million in premium in force in Texas, our first state outside of Florida to go over $100 million, and saw good growth across our entire footprint.

With that said, there's definitely competitive pressures that are differing in certain states, as others have expanded from Florida or elsewhere into those states. There's some homegrown competitors in some of those states. And we're constantly monitoring our market position and our rate adequacy, and expect to file for rate adjustments as needed. In fact, we just filed for a rate increase in Texas within the last month, and we'll look to file for in other states in Q1 and Q2 of 2017.

So we are grateful for the success we've had. Our value proposition has been well received. In almost all the states, we continue to do product hygiene to make sure we have the right rates and the right product features, and we're pleased with the way things are going outside of Florida.

Thanks. And another question about, as we look to the weather and some would call it global warming, you're seeing the threat of more frequent and severe catastrophic storms. Can you just talk a little about how you view those threats and how they impact your expansion and growth plans moving forward?

I don't want to get into a scientific, much less a political debate on one of these calls, but I'm not sure we've seen any compelling evidence suggesting that there is more frequent, more catastrophic storms occurring. I don't know that's a fact.

We do know that there has been a lot of bad weather the last couple of years in places, in Massachusetts in 2015, in Texas, Louisiana in 2016, some stuff starting the year off this year. And so you have to underwrite against it, you've got to price against it, you have to reinsure against it. You have to diversify against it, you have to do all those basic blocking and tackling insurance things. And so we hope for the best, but we have to be prepared for the worst.

Whatever the cause of storms is, we need to be prepared for it. We are taking all those actions to make sure we don't have any undue concentration anywhere, we are diversified, we have scale, we have the right price, and we buy the right reinsurance. All of those things have worked relatively well, and we hope that they will continue to in 2017.

Thanks. I appreciate the color. I definitely appreciate your comments on the reserve development questions because, looking at competitors, you see that their reserves for losses are almost half of what they were last year, and they're showing great revenue growth but they're not reserving a lot of for losses, and I appreciate the fact that you're trying to be more conservative. Good luck with the merger and thank you for your comments.

Thank you, Brenden.

Our next question comes from the line of Samir Khare with Capital Returns Management.

Good morning, guys. How are you?

Good, Samir, thank you.

Just some comments and questions on American Coastal: Upon closing of American Coastal, if you could provide us with at least eight quarters of GAAP financials for them, that would help tremendously for modelling purposes. And then how much expense saves might you guys realize from duplicative functions at American Coastal?

There are no expense synergies associated with our merger with American Coastal, except reinsurance cost synergies. American Coastal writes its business through AmRisk, the MGA when we will inherit a new five-year exclusive contract, and there are fees in that contract that are going to be unchanged as a result. And we think they get great value out of that contract; it's one of the key components of this transaction that was very attractive to us.

And so, American Coastal has very limited number of employees; you can count them on one hand, and so there aren't expense synergies in that merger. There are some very compelling reinsurance cost synergies with regard to combining our reinsurance programs, and we do expect to have a combined program this year and that's where you will see the real savings.

Okay. Thanks. And just the numbers, on the cats you guys reported $32 million. I just want to make sure that $30 million of it was, in fact, Hurricane Matthew, and $2 million was elsewhere, or is there a different breakout for that?

That's correct. Matthew is done at $30 million; it's 100% ceded at this point. The $1.8 million additional was development on prior accident quarters where we have exhausted the aggregate [truity] for 2016.

One bit of color on Matthew: Our modeled losses according to AIR and RMS were between $65 million and $75 million on Matthew, and it looks like we are coming in at about half of that number. So a good performance by the book of business relative to what the models predicted.

Okay. And the policy acquisition costs that increase I guess as you write more outside Florida, should we expect that increase to continue as you continue to expand outside Florida?

As the percentage of business outside of Florida becomes more, there's going to be pressure on that -- Florida commissions are around 12%, outside of Florida they're between 15% and 20%. So you can -- it's just a mathematical exercise; as you do more outside, it's going to be higher.

But not on a net basis. The reinsurance costs are lower, so net expense ratio, again, should not be significantly different.

That's exactly right.

Okay. And then the quota share that you guys entered 12/1, is that going to be filed in the 10-K?

Let's get back to you on that one. I don't know if that will be an exhibit or not. We will definitely do more disclosure around it in the K; that's for sure. But I'm not certain about that.

Okay, so I guess what I'm after is, certain terms and conditions, one of which I guess is there's coverage limitations for UPC on the contract, so I imagine that premiums will be something less than 20% of UPC premium? What do you think that percentage would be?

I think a good proxy is probably 17% or 18% of the consolidated amounts we are reporting, just because it is -- the subject premium is just United Property and Casualty Insurance Company. It excludes Interboro and Family Security, which are smaller books.

Okay. And then the ceding commission on the quota share?

We have not provided that intel; that's confidential.

Okay. And then the $4 million that you have had thus far of cats in Q1, that's gross and that would be decreased by the 20% quota share? Is that right?

No. It would not. It's a gross number, but the hurricane losses would be covered ground up from zero under the quota share, but not the kitty cats. The kitty cats do not get ceded under the quota share until we've reached our $30 million retention.

Okay. And just on the water claims, how many open water claims do you guys have for 2015 and how many do you have for 2016?

I can just tell you all open claims pending for the 2015 and prior accident years, so all accident years 2015 and prior we had 832 claims open, and the majority of those are going to be water, consistent with the percentage we have given historically about how water is between 50%, 60% of our incurred losses.

Okay. Do you guys have any rate increase in the pipeline planned?

I just said earlier, we just filed in Texas. We have several other filings pending in Q1 and Q2.

Two largest states are getting high-single digits, and it's going to be extremely helpful.

All right. Great. Thanks very much.

Next question is from Sam Hoffman with Lincoln Square Capital Management.

I just had two questions. The first was, was the adverse development a surprise which was pointed out by internal and external actuaries in the December, January, February time frame? Or was it something that became clear to you guys during the quarter as the case reserves piled up, I guess?

I would just tell you that every single quarter we try to make sure that we book the reserves to their right number, given the information that we have at that time. So we did that in Q3, and as additional information came available in Q4, we booked the reserves at the end of the year that we thought were the right number, trying to be conservative. So we use the best information we have at the time, given trends and projections and actual experience to book the reserves to a number that reflects what's going on economically.

And I would add, our internal actuarial views converge with our external independent actuarial view, and we both hate to be wrong. We're confident in the numbers.

What I'm getting at is, was the adverse development driven by a desire to put this 2015 accident year completely behind you at the last minute and, therefore, you took a degree of conservatism that wasn't necessarily viewable to Management during the quarter? Or was it just, little by little, it's something that you guys could tell was emerging as the claims came in and as the amounts increased throughout the quarter? What was the nature of the reserve increase?

It was, as I described earlier, we don't have the latitude to just say our internal actuary thinks reserves ought to be X but we're going to book 1.2 times that just to be conservative. We have to use a reasonable range of what's going on based on the actuarial science and the actual results that we get. And do we want to have a conservative bias on that number? Absolutely, but it's not an arbitrary number that we just say let's bump it up 10% just for the heck of it. We try to be at the conservative end of what we think is going on.

And so it's not something that is a surprise to us that we look at the numbers and go, holy cow, we didn't see that before. We're looking at stuff constantly, and we see what's happening in the book of business and then we wrap it all up at the end of the year. And as Brad said, we triangulate with our external actuaries; in this case, we even hired another external actuary to come in and review the process, and we ended up in a number that we feel confident is the right number, and we hope that certainly that will put to bed 2015, but there are no guarantees on that.

Okay. And then a second question is, what's the natural catastrophes so far this year?

The cat losses? I think Brad addressed that earlier.

Louisiana was impacted by tornadoes, as was Texas.

Okay. And then finally, in terms of pricing changes in states other than Florida, what was pricing change in the fourth quarter, and how do you see the market environment currently in 2017?

We look at each state on an individual basis. I think we mentioned earlier, we just filed for a high single-digit rate increase in Texas. We have several other filings in states outside of Florida that are in the works that will be filed in Q1 and Q2. In almost all cases they're going to be slightly higher rates that are justified based on both cat and non-cat loss experience outside of those states. And we have a very good and robust product management department that has a schedule, a very rigorous schedule of rate review and rate filings throughout the year in all 12 of the states that we're doing business in.

Terrific. Thank you.

Your next question is a follow-up from Arash Soleimani with KBW.

I just wanted to confirm, the 9% rate increase you mentioned earlier, was that the average for Florida statewide that you plan to have approved in the July time frame?

Yes. The overall is 8.9%, but it varies by territory -- same with Texas. The overall in Texas was 9%; the indication was 9.1%; we are taking 9%, but it varies greatly. It's going to be higher in certain parts, like Harris, and potentially lower in certain parts like Corpus Christi, where we think we've got more runway for growth and better experience.

Okay. Great. Thank you very much.

Thank you. At this time there are no further questions. This does conclude our question-and-answer session. At this time I will turn it back to Management for closing remarks.

Thank you very much. We really appreciate everybody's time on the call and the feedback and good questions.

Ron, we will revert back with some additional metrics that hopefully will shed some light on obviously a topic that is on our mind and everybody else's mind is what metric can we show that the reserving philosophy and actual practice in Dade and Broward as it relates to that part of the Business is going in the right direction. So we will get back to you on that.

Other than that, we continue to appreciate everybody's interest and support for UPC Insurance. And we look forward to talking to you again soon.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.