American Coastal Insurance Corp (ACIC) 2017 Q4 法說會逐字稿

Greetings, and welcome to the UPC Insurance 2017 Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Adam Prior. Thank you. You may begin.

Thank you, 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. And 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.

Before we get started, I'd like to read the following statement on behalf of the company. Except with respect to historical statement -- 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 its 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. 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.

This was the best quarter in the history of UPC Insurance. It feels good to say that after an eventful year when we experienced financial and operational challenges from significant non-hurricane cat losses in the first half of the year and losses with the unprecedented landfall of 2 Cat 4 hurricanes in the second half of the year. Despite all that, our team produced a quarter and a year that demonstrates both the financial resiliency of our model and the earnings power of our company.

The fourth quarter's EBITDA of over $42 million, which enabled us to earn a profit for the year despite the hurricanes and other cats, shows the strength of our combined company now that we have fully integrated the American Coastal business. Both sides of our combined business, personal lines and commercial lines, showed strong profitability for the quarter and overall profitability for the year.

Speaking of American Coastal, it produced in December and January 2 of its strongest months in the past couple of years, and is clearly reasserting itself as the market leader in the Florida commercial residential space.

On the personal lines side, we grew our policies in-force and premium by over 15% in 2017 while maintaining retention levels over 90% even as rate increases and over 70% of the book have begun to flow through. Part of the reason for that continued strength in writing and retaining new profitable business is our outstanding performance on the 2017 hurricanes.

Financially, we came through 2 Cat 4 hurricanes in our 2 largest states with over 85% of our reinsurance tower intact. We have already renewed a large part of our loss effective layers for June 1 at very attractive pricing, and we are well along in filling out all our June 1 reinsurance needs.

Our reinsurance partnerships are working well for a number of reasons. One of which is that our book of business outperformed the market on Hurricane Irma. As you know, at its height, that storm took a path through the lower West Coast of Florida, where UPC is the largest residential property insurer overall.

In the 5 lower West Coast counties, Collier, Lee, Charlotte, Sarasota and Manatee, UPC has between 10% and 15% market share compared to our statewide market share of about 6.5%. Over 50% of our Irma claims came from those 5 counties. Yet, of the over 750,000 total Irma residential property claims reported in Florida so far, UPC has accounted for only 4.1%. Of those claims, we have closed about 97%, 10 points above the statewide average of 87%.

For a company to have a year where it receives over 63,000 claims, more than double the prior year, and the year where it retains over $115 million of catastrophe losses, almost 12% of gross earned premium while enduring 2 Cat 4 hurricanes through its 2 largest states, is to be tested both operationally and financially.

In the same year, for that company to be able to close a transformational merger, achieve an investment grade debt rating, raise $150 million of capital on favorable terms, grow organically over 15%, implement rate increases on over 70% of its book, regain momentum in the Florida commercial line space, outperform the market on Hurricane Irma, achieve profitability and report the best quarter in the history of the company to close the year, is to pass the test.

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

Thank you, John. I'm Brad Martz, CFO of UPC Insurance. I'm pleased to review the financial highlights of our most recent quarter. But before we get to those, I would like to remind and encourage everyone to review our press release and Form 10-K for more information regarding our results.

Highlights of UPC's fourth quarter 2017 were: record revenues with year-over-year growth of 39%; improvement in loss ratios and our combined ratio; non-GAAP core income of $33 million or $0.77 a share; GAAP net income of $27 million or EPS of $0.63 a share that was aided by onetime tax benefit related to the Tax Cuts & Jobs Act that became law on December 22, 2017; achievement of an investment grade credit rating and successfully raising $150 million of new capital on favorable terms to support our ongoing growth initiatives.

Some additional insight into UPC's revenue growth for the quarter includes gross premiums written of $252 million, up 51% year-over-year; gross premiums earned of $274 million, also up 51% year-over-year; net premiums earned of $166 million, up 37% year-over-year. Direct premiums written for the quarter were 56% from Florida, 19% from the Gulf region, 16% from the Northeast and 9% from the Southeast region, with a mix of 72% personal lines and 28% commercial lines.

Florida's growth year-over-year was mainly driven by American Coastal's commercial gross written premium. Organic personal property premium grew 13% year-over-year from all regions. Net investment income increased $3 million or 101% year-over-year and our total policies in-force at year-end eclipsed 528,000 with nearly 1.1 billion of premium in-force.

UPC's fourth quarter losses decreased 27% from $99 million last year to $72 million this year driven by Hurricane Matthew in the prior year. Excluding the impact of net catastrophe losses and prior year reserve development, UPC's gross and net underlying loss ratios improved almost 7 points year-over-year, due primarily to lower attritional loss ratios of ACIC's commercial residential business and improvement in our personal lines non-cat loss ratio.

UPC Insurance saw its non-loss operating expense increased approximately $32 million or 64% year-over-year. $17 million or 52% of the change was driven by policy acquisition costs, which were consistent with premium growth as well as the inclusion of American Coastal's policy acquisition costs in the current year.

Policy acquisition costs were approximately 18.3% of gross premiums earned compared to 18.4% in the same quarter a year ago. The other $15 million or 48% of the change was driven by all other operating expenses, which were primarily impacted by amortization of intangible assets and software, which increased roughly $10 million year-over-year.

Our operating expenses, excluding noncash charges for amortization and depreciation, were approximately 6.7% of gross premiums earned compared to 7.3% in the same period a year ago. UPC's gross underlying expense ratio, which adjusts operating expenses for ceding commissions earned and merger expenses including the amortization of intangibles, was 23.7%, which is comparable to 23.4% during the fourth quarter of 2016.

On the balance sheet, UPC ended the quarter with total assets over $2 billion, including over $1.1 billion of cash and invested assets, a significant increase to our float of over $451 million year-over-year. Our liquidity included approximately $124 million of unrestricted cash to the holding company, which is available for contribution to any of our companies.

Notes payable increased to just over $161 million from the issuance of a new $150 million fixed rate note and the retirement of our $30 million variable senior rate -- senior note payable and $8.5 million note payable related to our acquisition of Interboro Insurance Company. Shareholders’ equity increased to approximately $537 million with a book value per share of $12.56, and the combined statutory surplus of our group at year-end was approximately $390 million.

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

Thanks, Brad. My only closing comment is to thank you all, once again, for your interest in UPC Insurance, especially our investors who have been with us on the journey. We are looking forward to a great 2018.

At this time, we'd like to open up the line to questions.

(Operator Instructions) Our first question is from Greg Peters from Raymond James.

I'll just chime in. I do like the conference call right after you report earnings. Most of the other companies that follow this pattern usually give us about an hour from the time they release to the time the call begins. So just -- maybe some of the other investors might appreciate an extra 30 minutes to go through the financials. Just my two cents on that.

We appreciate that guidance, Greg. But it's first time we've done it this way, so we'll take that into account if we do it again in the future.

Yes. Well, this is a great format. Anyways, I just wanted -- there's a lot of questions, and I know there's other people who are going to ask questions, so if I could just focus on a couple of areas. First of all, as we think about 2018 in the context of both the top line and then combined ratio results, your total gross written premium for the year is up 47%. What is sort of your budgeted amount that you're anticipating or expecting in terms of growth in total gross written premium for '18? Or what kind of budget do you have set for that?

Greg, this is Brad. I mean, historically, we haven't provided any forward-looking guidance, and I'm hesitant to do so on this call.

Okay. If you can come at it a different way. Of the 4 regions, are any of the regions, the growth profile that they generated in '17, is there any environmental change that may lead to some change in what your expected growth patterns are for '18?

Nothing significant. We do expect to continue to grow both our personal lines and commercial lines books in 2018.

Yes. I think our historical organic growth rates are still reasonable estimates. And remember, 2017's results only included 3 quarters of American Coastal. So 2018 will be our first full year with 4 quarters of American Coastal, and they were very profitable in the first quarter of last year as we evidenced by the 8-K filings and pro forma filings we included in our proxy last year. So taking that into consideration, you're going to see a healthy top line growth, again, year-over-year.

Well, keeping on the growth thing. John, in your comments you mentioned December and January being record months for American Coastal. It's our view -- we've been hearing in the market that the commercial properties side has been increasingly more competitive. Is there any change in the marketplace? Or is it just a more attractive product you're offering? Maybe you could fill in some blanks there.

Sure. I'm going to make one clarification. I don't believe I said record months. If I did, it was a -- I misspoke. I said the best months that they've had in a couple of years. I couldn't speak whether they're record months, but they were very good months. So American Coastal is the market leader in the commercial residential space in Florida with close to 30% market share. They've been the market leader since they were established a decade ago. And so there's something that goes along with having been there for the long run, having come through the storms in good shape, being part of a bigger stronger financial organization with great relationships with agents. Lots of companies have come and go in the space, and American Coastal has been there and delivered for its agents and its policyholders, and that's reaping the benefits. They benefit from the relationship with AmRisc, which is the premier underwriter of commercial cat-exposed risk in the country period. And that underwriting prowess, their historical presence in the market, their relationships, are all bearing fruit and as we move forward.

I would also say, we've seen a decline in reckless competition. So there's competition, but there's reckless competition and we've improved rate adequacy. I think our appetite to resume growth in Florida has increased.

And then is there an intention to take American Coastal, the commercial side, beyond Florida and to other coastal states? And is that expected to happen in 2018?

We're evaluating all potential avenues of growth for our commercial line side of our business, but we don't have any specific plans to announce at this point.

Okay. I'll stop with the top line inquiry. And then the other area I just wanted to focus on briefly is just both the expenses. You noted the expenses were up not only in the fourth quarter, but for the full year. Part of that, of course, is associated with the growth. I'm just curious if there's any initiatives underway where you might be able to see some expense ratio improvement in 2018. And then, secondly, on the underlying loss ratio. It certainly seems to have been the best result you reported in the last 5 years. Is there -- because of the rate action you've been able to implement over the last year, is it expected to improve further in 2018?

Greg, this is Brad. I think on the underlying loss ratio piece, it really has more to do with the inclusion of American Coastal's book this year versus last year. American Coastal, the commercial residential business, runs at a much lower attritional loss ratio. So as that blends in, it's bringing our overall underlying loss results down, which we expected. That's one of the benefits we talked about at the merger. On the operating expense side, I did mention in my comments that our policy acquisition costs are relatively flat at 18.3%. They're down 0.1% year-over-year. And all other operating expenses, really, if you backout the amortization expense from general administration, we're right where we need to be. Is there room for improvement? Absolutely. Are we satisfied with the expense ratio? No. I think we can drive it lower, and there is some evidence in the current quarter that that's occurring.

Okay. Great answers. And I'll just close out. Can you provide any sort of guidance around what you are modeling for your GAAP tax rate for 2018?

I would guide towards 26% of effective rate for our company blended, state and federal.

(Operator Instructions) Our next question is from Arash Soleimani from KBW.

Brad, can you remind me what was the impact of tax reform this quarter? What was the beneficial impact?

Beneficial impact was approximately $5.3 million. That came from revaluing our deferred tax liabilities at the new effective lower rate.

Okay. So basically about $0.12 of the $0.77 adjusted number?

Correct.

Okay. And then just touching back on commercial residential. So what does the rate environment look like in 2018 there? I know 2017, obviously, had some rate decreases within that line, but are we in a rising rate environment in Florida for that line?

I'm not sure that I would say that we're in a rising rate environment. But certainly, it's very easy to say that the rate of decline has lessened or stopped. And it seems to be, at the very least, a much more stable rate environment.

Okay. Just jumping back to tax a bit. With the rate lower, do you see any kind of regulatory risk in Florida similar to what's going on in California? Or do you think that the tax benefits that you get will really be able to basically flow to the bottom line without getting -- without any kind of mandate for them to be shared with policyholders?

We certainly can't speculate on what regulators might do. We've had no communication from the Florida Office of Insurance Regulation with regard to that.

I guess, maybe asked -- go ahead, sorry.

Yes. The impact would be negligible given the profit loads in our current rate balance in Florida. I can't say that.

Okay. And just based on what you're seeing in the market, I mean, do you see continued indications for rate increases in 2018 in Florida?

We evaluate all 12 of our states every year. We're in the process of doing that. As you know, we took rate increases on over 70% of our personal lines book last year. Those are flowing through nicely now. We have another rate increase at the end of the year on our new Florida HO3 product that's starting to flow through here very soon. And we're evaluating all our states and we'll be filing for our rate needs as needed here in Q1.

Okay. And does your reinsurance buying -- I guess the way you approach reinsurance, does that change post-Irma? Obviously, you guys had good protection going into it. I think you were at like a 1 in 400 return period. But does anything change just given the potential for Irma to have may directly unfold into Miami? Do you look at your spend differently now to kind of prevent the worst-case scenario?

Sure. I think we were at your conference in New York when Irma was in the water and the Weather Channel had Miami Cat 5 in the cone, and everybody asked that question at that investor conference. What does this mean for UPC Insurance? And I'll say now what we said then. It means that maybe it goes halfway up our reinsurance tower rather than only 15% of the way up. And in fact, for our company, the lower West Coast of Florida is a more worst-case -- a worst-case scenario than the lower East Coast of Florida because, as I mentioned in my remarks, that's where we have disproportionate market share compared to the rest of the state. So our -- we buy reinsurance differently than other folks do. We buy a lot of first event limit. We've seen some estimates from the reinsurance community that suggests we're one of the top 10 largest buyers of U.S. property cat reinsurance in the world, buying more first event coverage than any other company down in Southern Florida, even those with more cat risk. So we're really happy and comfortable with the way that we buy reinsurance. Are we looking to improve and tweak it here and there? Of course, we are. But we have a great program. And now that we've in-sourced our reinsurance intermediary work with the establishment at Skyway Re, we're going to be even better in 2018.

And now that you've, obviously, been a combined entity with American Coastal for some time, I mean, is there any update to your thinking around an A.M. Best rating?

I don't know about an update. Just an evolution. We've been saying on these calls for a couple of years at least that we think that an A.M. Best rating for all of our portion of our company will be a natural evolution of our business as we grow and diversify. We still think that. We don't have anything to announce in that regard, but we think there's some potential opportunities down the road. And when we get there, we'll be able to tell you about that. We're doing nothing specific in that regard right now.

Okay. And I guess maybe just to touch on that in a different way. To what -- is there that much of a benefit from having it in the sense that you've been able to get the business that you want regardless of having one? Is it worth, I guess, the capital charge in your eyes?

That is the exact question we ask ourselves when we consider that, and we do the analysis and try and say what's the ROI on investing in an A.M. Best rating. And to date, we haven't needed it and the ROI did not look compelling to do it. But as we -- as I said, as we grow and diversify the costs, it gets lessened and there certainly would be incremental opportunities that would come to us from a distribution standpoint if we had it. So we just continue to update that analysis and think about it. And once we commit to it, we'll commit to it. That's not yet.

And just my last question is looking in Florida. Obviously, you had, I guess, stopped the writing of much new business in some counties such as the Tri-County area of Florida. Is that still the case? Or do you -- when do you see an opportunity to potentially start growing in those regions again?

Well, that is still the case that we have virtually no new business coming from those areas intentionally. And we don't see a window of reopening that anytime soon. And let me clarify that. That's on the personal line side. We are still writing there on the commercial line side. Because on the commercial residential side, the AOB issue hasn't been an issue.

Our next question is from Elyse Greenspan from Wells Fargo.

This is Weston Bloomer, on for Elyse. I apologize if this has been already asked, I hopped on a little late. But on the reinsurance side, could you provide an update following the renewal of your quota share and aggregate reinsurance cover at 1/1? And are there any changes to the program that we might see this year? I guess, it would be great to have an update or initial view on the Jan. 1 renewals.

We're really happy with the way the Jan. 1 renewals went. We did renew our quota share with a different panel of reinsurers that we're really happy with. Our previous panel did a great job. But for various reasons, we decided to change that up a little bit. And so we've got (inaudible) in January now as our quota share partners. A pretty blue chip group of reinsurers and we are pleased with the way that turned out. Also pleased with the way that we were able to do some non-hurricane cat ag renewal, slightly differently than we've done before. But again, it fit our needs and we're happy with the way that all went, both from a reception from the markets and pricing standpoint. And we're well on our way, as I said in my remarks, to filling out our June 1 renewal even as we speak.

Great. And then just as a follow-up. Are there any cats that may take you in the 1Q to date or anything to call out there?

Well, Q1 -- like first week of Q1 was pretty cold in Florida and elsewhere, and there were a lot of burst pipes. So the year got off to a cold start everywhere for the first couple of weeks. So there's elevated level of claims activity when that happened, especially when it's cold in southern states where they're not used to pipes freezing and thawing. And so for sure, there was an elevated level of claims activity for at least part of January, but nothing resembling what we've seen in prior years.

Our next question is from Samir Khare from Capital Returns Management.

I apologize if I missed this already. Have you guys injected any capital into the insurance subsidiary since the hurricanes?

Yes, we have.

How much?

We put $25 million into United Property & Casualty and $5 million into Family Security in December.

Okay. And then on the reinsurance front, you guys mentioned you've secured a large part of the program already at favorable terms. Can you go into that sum? And with all the moving parts, how much of an increase do you anticipate getting on your reinsurance program?

We really can't. It's premature. We will do the appropriate disclosures once the program is finalized.

Okay. All right. Any benefit to your Florida growth numbers and your underlying loss ratio owing to the temporary emergency order from the IR?

Any benefit? No.

No. Okay. And I think over the years, the other income line item has had different things that contributed to it. Can you just remind us what's in that line item and what a good run rate is for that in 2018?

It's only had 2 lines -- 2 items in it. Historically, it had policy fees and the ceding commission income. Ceding commission income started in fourth quarter of 2016.

Okay. And a good run rate for that into 2018?

We don't really provide that kind of guidance.

Okay. And I just want to make sure I understand this. On the policy acquisition costs, going forward, when all the capitalized (inaudible) runs out, what's a good run rate for that?

Again, we're not going to provide specific guidance on line items in the income statement. We have not had a historical practice of doing that.

Okay. All right. Then let me ask it this way, right now, the policy acquisition costs it benefits from not having, I guess, the unearned premium -- the acquisition costs associated with unearned premium from American Coastal, is that right?

No. That's not entirely correct. There's obviously some of that in there. So post acquisition, there's a good chunk of that in there. So the policy acquisition costs in the fourth quarter are as good a proxy as any. Some of that amortization expense will move up in the pack -- from G&A to pack. But it's going to impact the overall expense ratio.

Our next question is from Greg Peters from Raymond James.

So 2 for you. First, I wanted you -- to give you an opportunity to update us on your distribution relationships with GEICO and Allstate. And then secondly, provide us a perspective on the M&A environment today. You've been very successful with past M&A activities, and I'm just curious where your head is at as you think about 2018.

Sure. I'll start with GEICO and Allstate, both of whom are very important partners for us. Allstate only in Florida, been a long-standing very good partner and we're grateful to continue to have them as a partner. GEICO writes throughout our footprint with us. They've been increasing their writings. We have established a very good relationship with them. They have multiple distribution channels through their call centers and their field representatives, and we're able to access all of that. And our relationship has grown closer and bigger. We've established internal targets for our business with them in 2018 that we're both very pleased with, and that continues to be a very productive relationship that we hope will continue to grow. And we appreciate their partnership, too. In terms of M&A, it's funny to say this since we essentially have done 3 transactions in 3 years, but we never intended to do any transactions. They were all serendipity that were shown to us at the right time and made sense. We've said no far more often. I heard Warren Buffett say recently that the difference between successful people and really successful people is that really successful people say no almost all the time. And that's really what we've done. People have shown us every idea under the sun, and we have such a strong belief in our core distribution system and our model that we've grown into these other states that -- and our culture that we would only do anything that was going to be strategically consistent and culturally compatible. And there just aren't that many out there. So we're not seeking anything. We continue to get shown ideas here and there by folks, but we really are happy with the company we have now and the ability that we have to grow it going forward.

And John, when I reflect back on the fourth quarter 2016 and I remember you talking about some of the challenges you had on the claims side and work that you were doing to improve that, and then I reflect on the catastrophe experience and the claim activity in 2017. Do you think your claim organization is now where it needs to be in terms of being able to process claim surge? Or do you have more actions underway to improve it further?

Clearly, our claims department has improved light years under Scott St. John's leadership since he arrived at the company in August 2016. We have made amazing strides. You don't need to look a whole lot farther then to see that we had no adverse development in total for 2017. We had favorable development. In 2016, we had $17 million of unfavorable development in our non-cat claims. And so that speaks volumes, especially in a year, as I said, when we have 63,000 claims versus 27,000 a year before. When you get that many claims, are there going to be challenges logistically and operationally? Absolutely. Did we have challenges? We sure did. But we've closed 97% of our claims and we've done a really good job compared to the market as a whole. Did we learn some things? Yes, we are upgrading lots of different things based on the volume that we saw. We want to be able to scale. We're continuing to grow. And so like everything else we've done in the last 5.5 years since this leadership team got to the company, we move forward, we make mistakes, we will learn from them, we get better, we get better, we get better. And our claims department is one of the really shining stars of our company in 2017 with the growth that we had and the way that they were able to respond. So it will be better in 2018. We're not where we need to be, but we're getting there. We're at the point now where, I believe, all of our non-cat claims are being handled by UPC desk adjusters who are employees. When Scott St. John got to the department in August 2016, that number was under 20%. And the difference between an external adjuster handling your claim and an internal one wearing a UPC shirt with that pride of ownership is huge. So we're really happy with where we're going in claims.

Is there a difference in the way your claim team handles the commercial property risk and the claims in that area versus the claims in the personal side? Or are they 2 separate teams?

Yes, there is a difference. American Coastal, historically, had done all of its claims through a single external TPA. And that relationship, we inherited. They're a very fine TPA and have done a good job. So we're -- we continue to evaluate that. We do have a bias at our company to in-sourcing core insurance functions like claims. And so we'll evaluate over time how much, if any, of that commercial stuff we want to bring in-house on the claim side. But for now, we have that external relationship that American Coastal has had historically.

Thank you. I'd like to turn the floor back over to management now for any closing comments.

Well, once again, thank you, everybody, for being on the call on short notice. We definitely took note of Greg Peters comment that we should look to leave a little more time between release and call. If we do an afternoon release, an afternoon call next time, we will take that into account. But in the meantime, thanks again for your interest in UPC Insurance. We look forward to moving together -- moving forward together with all of you. Thanks for your time today.

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