American Coastal Insurance Corp (ACIC) 2018 Q2 法說會逐字稿

Greetings, and welcome to the United Insurance Holdings Corp. Second Quarter 2018 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Prior with The Equity Group. Thank you, Mr. Prior, 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 we'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 information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities law, 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 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.

Q2 2018 was a solid quarter for our company. Top line, we had our best quarter ever from both the written and earned premium perspective. Bottom line, despite retaining over $17 million in cat losses, we had our best Q2 ever and the second best quarter in our company's history after only Q4 2017 when we retained only $1.3 million in cat losses.

Driving our results with balanced organic growth. Overall, our book grew at a 12% annualized rate during the first half of the year, and average premiums are stable or increasing. Both our personal and commercial lines books saw solid growth. Combine that growth with the improvements to our gross loss and expense ratios that we produced in Q2 and you can see why we had strong results.

At this point, I'd like to turn it over to Brad for his remarks.

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

The highlights of UPC second quarter 2018 included our biggest production quarter ever with $385 million of gross premiums written, an increase of 9.2% year-over-year; GAAP net income of $14.7 million or $0.34 a share; non-GAAP core income of $15.5 million or $0.36 a share; the combined and underlying combined ratios of 94.2% and 84.6%, respectively; and the successful renewal of our core catastrophe property reinsurance program at June 1, providing UPC with over $3.1 billion of robust reinsurance protection against named windstorms and earthquakes nationwide.

Some additional insight into UPC's revenue for the quarter includes gross premiums earned of $290 million, up 11% over the same period a year ago; net premiums earned of $171 million, 7% growth year-over-year. Our direct premiums written for the quarter were a mix of 2/3 personal lines, 1/3 commercial lines, with roughly 70% of our direct written premium growth coming from outside of Florida. The Northeast was our fastest growing region, up 16% for the year, led by New York, where we are starting to see some nice traction with our new product.

Both personal lines and commercial lines each grew approximately 9% year-over-year, providing nice balance to the portfolio. Our assumed commercial E&S premiums grew nearly $15 million or 15% (sic) [50%] year-over-year. And our investment income increased to $7.1 million, a 53% increase.

Other revenue decreased $10.1 million or 73% year-over-year, due to a change in the company's presentation of ceding commissions earned, which totaled $10.4 million for the quarter. Ceding commissions earned have historically been presented as other revenue, but our results for the 3 and 6 months ended June 30, 2018, now show these amounts as reductions to ceded earned premiums and policy acquisition costs. Ceding commissions are intended to be reimbursements for reinsurance and acquisition costs incurred related to the production of insurance contracts. This change in presentation had no impact to net income or core income, but it did remove the distortive effect on our net expense ratio and combined ratio, which means we will no longer adjust our underlying expense and combined ratios for ceding commissions going forward.

This change in presentation was adopted prospectively for 2018. So our 2017 results did not change.

UPC second quarter losses increased 2% from $87 million last year to $88.6 million this year. This produced a 30.6% gross loss ratio, down nearly 3 points from 33.2% a year ago. Net retained cat losses of $17.3 million added about 10 points to our net loss and combined ratios for the current quarter, but did compare favorably to $21.8 million last year, which added 13.7 points to our net loss and combined ratios in Q2 '17.

Excluding the impacts of net retained catastrophe losses and favorable prior year development of just under $1 million, UPC's gross and net underlying loss ratios were mostly unchanged from the same period a year ago.

UPC saw its non-loss operating expenses decrease approximately $5 million or 6% year-over-year during the current quarter. That was driven by a $7.1 million increase in policy acquisition cost, which was offset by a $12.1 million decrease in all other operating expenses.

The $50.5 million of policy acquisition costs for the current quarter and the resulting increase for the year included an $8.1 million reduction related to ceding commissions earned. The remaining $2.3 million of ceding commissions earned during the quarter were presented as a reduction to ceded earned premiums.

The other operating expense decreases were driven by a $9.4 million decrease in noncash amortization expense and a $6.7 million decrease in nonrecurring professional service expenses related to our merger with AmCo Holding Company last year. The company's gross expense ratio was 25.1%, which compares favorably to the prior year of 29.7% and 25.7% on an underlying basis, which adjusts for the ceding commissions earned last year and is the most comparable measure to the current quarter.

On the balance sheet, UPC ended the quarter with total assets of over $2.3 billion, including nearly $1.2 billion of cash-invested assets. Our liquidity included approximately $118 million of unrestricted liquidity at the holding company. Shareholders' equity increased to just under $545 million, with the book value per share of $12.72 and just under $13 excluding accumulated other comprehensive income. The combined statutory surplus for the group increased approximately $410 million at the end of the quarter.

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

Thank you, Brad. This was a solid quarter, but we can do better. And that's the really good news. The Sky cycling team that just won the Tour de France for the sixth time in the last 7 years has popularized this concept of the aggregation of marginal gains. We need that philosophy at UPC, sweating out all the small details that matter, learning from every situation and making marginal gains across our platform that aggregate into big improvements.

Q2 gives a little hint of what that can do. And we're looking forward to showing continued improvement as we go forward together on our journey. As always, we appreciate your continued support.

With that, we will conclude our remarks and open up the line to questions.

(Operator Instructions) Our first question comes from the line of Greg Peters with Raymond James.

I'm going to just limit my questions to 2. One is around growth and the other one is a balance sheet question. So with respect to growth, in your comments, you mentioned a combination of rate and units. So I was hoping and -- I was hoping you could provide more color around that. I was hoping you could provide more color about where you're getting -- is it more on the personal line side or the commercial side? And then finally, use it to update us on GEICO and Allstate?

Sure. I think the way to characterize that is, as I said in my remarks, rates are stable or increasing. Our average premiums are up slightly on the personal line side and fairly stable on the commercial line side, which is a big change from where things had been in the past. And so that's translated into annualized double-digit growth in premium combined on our underlying book, which we feel really good about. You remember that we took some fairly significant rate increases last year on our personal lines book that are now flowing through that book. We've taken some additional rate action this year where we needed so that we can get the rate that we need and still be competitive. And it looks like that -- those efforts are working the way that we had intended them to. So we feel good about that. We were able to maintain growth both in units and premium even in the face of some higher rates in some of the states that we needed to take rate in.

And on GEICO and Allstate?

Both relationships continue to be strong. I mean, we don't have any significant changes to announce to either one of those. They've both been excellent partners for us. And the GEICO business is up significantly from where it was a year ago. And remember, a year ago, they accounted for about 10% of our new business. And that number -- the absolute and the relative number on the personal line side has gone up this year.

Great. On the balance sheet side, now that growth -- I don't want to diminish the fact that your gross written premium is up 9% and it's solid results. But growth has definitely slowed relative to prior years. I was wondering if you could comment on how you view your capital position at this point. And then an as an additional question, Brad, maybe you can chime in on this, I'm kind of surprised that the reinsurance recoverable didn't go down by more as you pay off Irma claims, but maybe I'm missing something there.

Yes. I would say on growth, it's -- we're a $1.1 billion-plus company now. So percentage-wise, it's going to go down. It's still double digit. It's 12% annualized in terms of dollars. So that's a good number on that base. On an absolute basis, we're writing more new business than we ever have before, and it's not even close. So our rate of production of new organic business is higher than it's ever been. It's just that as a percentage of the in-force book, it's lower than it's been in prior years, as you noted, just because our -- the denominator has gotten so much bigger.

Right. And you're just -- where are you with your capital position? I know one of your aspirational goals was to get an A.M. Best rating at some point.

And it still is a goal, and maybe we can take it out of the aspirational category and put it into something a little -- that sounds a little more in the near to mid-term. We're focused on making sure that we have the right arrows in our quiver to enable us to grow our book of business. As you know, if you've -- well, on the last call, I asked everybody to take a quick 4.5-minute look at our video on our website, UPC Story. And if you watch that, you'll see at the end our -- both our Chairman and Vice Chairman of the board saying some pretty big numbers that they had in mind for growth to try to get our company to $5 billion in premium over some period of time. To go from $1.1 billion to $5 billion in premium means we're not going to be a Demotech-rated personal line-focused company. That's not going to get us to $5 billion. And so yes, we are keenly aware of the need to add different products and different ratings to our portfolio in order to enable us to continue to grow the business and realize the opportunities that we see out there. And we're focused on doing that. We don't have anything to announce at this time, but we're trying to move in that direction.

Great. And Brad, could you just give me an update on the reinsurance recoverable? And I'll stop there.

Sure. In February, we definitely started seeing some loss creep from Irma. I thought we were really probably one of the first carriers to address it head on. Once we got to around April, we knew it was fairly clear that it was a trend that required us to increase our reserves. So that's what's offsetting some of the recoveries we did collect is the overall increase in our gross estimate for Hurricane Irma.

Okay. Well, I mean, it's still with the recoverable of close to $370 million, I would have expected that we're going to be approaching the anniversary of Irma, and I would have expected a big portion of that to have been paid out. Is the difference just solely the increase in what your expectation is around the gross loss? Or maybe you can -- let's come at it a different way. How much have you been -- how much have you paid out so far in total?

Give me a minute, I can get that number for you. I can tell you that the vast majority of it is -- a huge chunk of it's obviously IBNR, but paid on Irma is over $400 million.

(Operator Instructions) Our next question comes from the line of Elyse Greenspan with Wells Fargo.

So I guess, my first question following up on those last questions about Irma from Greg. How much did your gross loss go up by this past quarter?

The only guidance we've ever given on Irma was in our initial press release way back in September of 2017 when we were about a week or so post event. So -- and that number was $450 million for both Harvey and Irma, Irma being $400 million of that. Today, our reserve -- gross reserve for Irma sits at $623 million.

Okay. I think...

It did include a small change at year-end and then obviously a bigger change in the first half of this year.

That was something we did several months ago. By the way, it wasn't something we did in May or June or July. We -- it's not news to any of our reinsurers that we deal with. So some of it that we did early, and I think we still -- based on the most recent PCS' modeled estimates, our share of the losses on Irma are significantly less than our market share of the business. And so our book performed very well on Irma.

Then a couple of other numbers questions. The investment income was pretty strong in the quarter. Is that just above the $7 million or so about a quarterly run rate level? And can you give us the new money read on the investment portfolio today or for the second quarter?

Yes. We feel that's a fairly healthy increase. Obviously, we added capital. Last year, we saw boost assets under management. And the yield to [worst] right now is a little over 3%. So we feel good with rates on the rise. So we have the portfolios constructed. It's all short-term, high credit quality, 100% investment-grade. And we are taking advantage of the rising rates.

Okay. And then where did the -- there was a $45 million of assumed premium for commercial property book in the quarter. Can we just get -- is there any more color you can provide there?

Year-over-year, we've added a couple of new carrier partnerships. So in the previous year, we had one. To date, we have three carriers that we're sending some commercial E&S business from. We have not named those counterparties, and we don't intend to do so. But it's business we really, really like, and we're very thankful and unfortunate to have those partnerships.

And is there something -- like how do we think about the level of, I guess, assumed premium on a quarterly basis? Or is there some volatility to when this might come on?

Well, second quarter is the strongest quarter historically for the commercial book in general. So I think E&S is no exception to that, given the cat exposure embedded in some of that business. But we were originally guiding towards an annual run rate of just under $100 million.

Okay, great. And then I think from your prepared remarks, it doesn't seem like there was anything kind of one-off in the underlying loss ratio in the quarter. But did anything stand out? Or is this kind of a good level to use when we think about the margin going forward?

Yes, I think it is. We -- like John said in the opening remarks, I think we could have done better and we hope to do better. But I think it's a safe number to use as was our gross expense ratio. I think our gross expense ratios can be between 25%, 26%, broken out on the low side about 18 points in PAC, 3 points in operating and underwriting, 4 points of G&A, and it gets you to 25%. On the high side, it's 18.5% of PAC, 3.25% for operating, 4.25% for G&A gets you to 26%. So those should be the run rates for those numbers going forward.

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

Just the dynamics that you saw with respect to Irma that could cause you to increase your gross loss? Can you talk about that, John?

I think it's the same thing that everybody has seen in market in Florida. The litigation can't start till 90 days after the events. And once that started in January, February time frame, it was clear that, that was going to -- that the legal industry had ramped up pretty good and was going to reopen and mitigate claims. And so we saw a fair amount of that. And then the roof tile issue, which I won't belabor, I'm sure you've all heard about the roof tile issue, which was a new issue that was a very specific one related to the timing of this event and the demographics and age of roofs in Florida. But that was one that was a surprise, I think, to everybody that ended up being a pretty expensive one. And so those were the 2 main drivers, litigation and roof tile. But there's just an accumulation of various things. And as I said, our losses on Irma were higher than our initial estimate. And you know that PCS had increased their estimate quite significantly. And so as a percentage of market share, our losses are still well below our percentage of the market.

Okay, great. And any rate increases that you guys have in the pipeline or contemplated in Florida in the near future and other states as well?

We operate in 12 states, as you know. We have multiple products in those states. So we have literally a dozens of different products that we're reviewing continually. And we filed for some rate in various states this year, including Texas, where we had a fairly significant rate increase and in Georgia. And we are constantly evaluating our rate adequacy and have a continual sort of filing program to make sure that our rates in all of our states are up to date.

Okay. How about just Florida? Let's try that one. Is there anything in the pipeline for that?

Nothing specific.

Yes, the annual indication will be done in Q4 and start to (inaudible). And so it's premature to comment on what that indication might be. But I don't think it'll be much. I don't expect -- there are about 8 states could be up low single-digit, and there are probably 4 states that could be down low single digit, net overall a small increase. Rate change probably isn't likely to be a big driver in the short term.

Okay. And just on the cats, can you get into that a little bit, how many cats were there, in which geographies, what the grass losses were for each?

Yes. I would prefer to defer you to our 10-Q, which we expect to file on Friday. That will have more detail on the cat activity for the quarter.

Okay. Just specifically on the -- I guess, the reinsurance covering the smaller cats, with the -- I guess, the quota share and the aggregate stop loss, I would have expected the net loss to be a little bit smaller than $17 million. So I'm just wondering if there is any cats from the commercial E&S lines?

No. It's all personal lines.

Correct. It's great you're seeing -- there was some development on the Q1 event that creeped into second quarter. But we are on pace to hit our sort of annual net retained non-hurricane cat loss number. And so we feel good about the way the reinsurance programs responded, both quota share and the aggregate.

The models would suggest, Samir, that 85% of our non-hurricane cat activity is over for the year. So Q2 was not unexpected. That's sort of how the way the book models Q1 and Q2, and then Q3 and Q4 on that side obviously go way off. So as Brad said, we're on pace for work within our annualized plan for non-hurricane cat activity.

Okay. And just a quick one on tax. Seemed to be lower than expected. Can you just talk about what caused that?

Nothing significant. Nothing to point out, just timing differences.

All right. And last one. What was your statutory surplus as of 6/30?

$410 million.

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

Brad, a quick question on the expense ratio. You had about $2 million of amortization. In the past, you had backed that out of the adjusted expense ratio. But this quarter, you didn't. I was just curious if there was any reason for that.

Well, we want to be more consistent with standard industry practice. We do feel like that's an item that will be fleeting going forward. And we do track it. We look at it carefully. It was just a presentation change that we thought was appropriate, given the bigger presentation change for the quarter, which was finally dealing with our ceding commission incomes, which as you know, primarily come from our quota share reinsurance program that has distorted our net expense and combined ratios and forced us to do some of these non-GAAP measures, which everyone is uncomfortable with. So we're very pleased that we've rectified that going forward.

And in terms of states, in addition to the states you're writing in or licensed in, are there any other states that you guys are thinking of for the future?

Broadly speaking, Arash, we're a specialty property cat underwriter, and that encompasses a variety of different potential cat situations that go beyond our current footprint. So we don't have any existing plans, but we're thinking long-term and big picture strategically that certainly are other states that will present an opportunity for us to take advantage of our core competency in underwriting property cat risk and do business in those states. So yes, there are other states, but we don't have anything specific to announce on this call.

Okay. And in terms of your Florida appetite, are you still doing any kind of exposure reduction in Tri-County?

We're not writing new business in Broward and Dade and are trying to manage our book appropriately, given the difficulties in those markets down there. But our Florida book is performing very well. We have grown our Florida book fairly significantly since Irma, as other carriers have either lost their appetite or agents have lost their appetite to do business with carriers who didn't perform well on Irma. And so we've been able to write high-quality business in our new product at rates that we really like and our now cat loss ratio in Florida was as good as it's been in a long time this quarter. So we feel really heartened by what's happened in Florida in the last 7 or 8 months as we've rolled out the new products, seen the follow-up from Irma, significantly increased the quality of our claims efforts and the book showing the results of that.

And lastly, I just wanted to know if you could provide an update on the competitive environment in commercial lines?

Still a competitive environment. We love the way the team at AmRisc that underwrites the business for us, fights on every account, applies very thoughtful analysis to where and when to draw a line in the sand on premium. And they've been very skillful about how they've managed that book and those relationships with the agents. And so we welcome competition. We have it in all of our lines of business. That business is certainly still competitive. But our results show that agents still want to do business with American Coastal and AmRisc because of the high quality of the people there and the way that we service those products. And so we've been able to avoid losing premium while still maintaining our policy count. It's been a very neat trick, and we love the trends that we see in that business right now.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Well, thanks, everybody. We really appreciate it. I know there's a ton of moving parts in the numbers. There are 2 big things that impacted the presentation in comparison to last year, were the ceding commission change in accounting for our quota share, which puts us back to industry standard accounting, which we did not have before. So we're happy to do it and glad that we're able to do it. But it does present comparability issues. And then the merger accounting is some stuff, which starts out in merger accounting as amortization flips over time into path. And so that distorts the -- this core income of accounting comparability. And so it's difficult to unravel that stuff. But the bottom line is, for us, we had our best top line quarter ever. We doubled our net income from last year and we had our second best earnings ever at our company. So we feel good about it. The comparability issues will go away as -- over time, and we appreciate you're looking through that. And thank you so much for your interest in and support for our company.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.