American Coastal Insurance Corp (ACIC) 2018 Q4 法說會逐字稿

Greetings, and welcome to the United Insurance Holdings Corp. Fourth Quarter and Year-end 2018 Conference Call. (Operator Instructions) Please note, this conference is being recorded.

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

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. In addition, the company has made an accompanying presentation available as well. 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 laws, including statements relating to trends in the company's operations and financial results and the business and the products of the company and subsidiaries.

Actual results from UPC may differ materially from those results anticipated in these forward-looking statements as a result of risks and uncertainties, including those described from time to time in UPC's filings with the U.S. Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

With that, I'd now like to turn the call over to Mr. 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 you taking time to join us on the call.

As Adam said, for the first time, this quarter, we are publishing an investor presentation in conjunction with our earnings release. You can find it on our website at the address shown at the top of our press release, and I encourage you to review it. While we will not be going slide-by-slide through that presentation, we may refer from time to time to some of the data and analytics included therein.

As expected, we had a lot of noise in the quarter from Hurricane Michael and other cat activity not to mention the effects of the new accounting rule related to equity gains and losses. However, underneath it all, there were a lot of positives. One, we continued to produce strong organic growth. Both personal lines and commercial lines grew at a double-digit rate in the quarter. For the year, we wrote about 150,000 new personal line policies, retained over 89% of our business and ended the year with over 560,000 personal lines policies in-force, 60% of them outside the State of Florida.

For the year in commercial lines, we wrote 1,233 new policies, retained over 86% of our business and ended the year with over 5,300 policies in-force. Overall premiums of both commercial and personal lines business have been stable.

Our underlying combined ratio for the quarter declined over 600 basis points from a year ago. Hopefully, this helps put to rest any lingering concerns about underlying performance after the outlier non-cat losses we had in Q3. Please make sure to look at Page 12 in the investor presentation, which shows that our accident year actuarially indicated personal lines loss ratio for 2018 was at its lowest level since 2014, both overall and in Florida.

The Florida actuarial indication for non-cat personal lines loss ratio was down over 5 points year-over-year. We have taken a variety of rate and underwriting actions over the past couple of years that have enabled us to continue to grow organically where we want to grow, while driving down underlying loss ratios, thereby, providing us additional underlying margin to withstand future cat activity and remain profitable.

Third, during the quarter we gained approval in Florida for our first A.M. Best-rated product from our newly formed subsidiary, Journey. Subsequent to year-end, we wrote our first Journey policy and there will be many more to come. That's speed to market. Journey wasn't even formed until the end of September, and we were in the market with an approved admitted market product 2 months later and have already put business on the books. Thanks to the great team at AmRisc for all their efforts to help us get Journey launched and into the market so quickly. This will be a big vehicle for growth for us in 2019 and beyond as we add states and products to it.

Last positive I'll highlight, during the quarter, we extended quota share reinsurance program with Munich Re, TransRe and Gen Re and negotiated renewal of much of our 2018 loss-affected cat layers at favorable pricing. We appreciate the strong partnership mentality demonstrated by our reinsurers, and we look forward to working with them to complete the remainder of our 61 renewal. Please refer to Pages 17 and 18 in the investor presentation to get a better appreciation for the depth of our reinsurance programs, which cover a variety of risks for our various entities, and in aggregate, total over $4 billion.

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

Thank you, John, and hello, this is Brad Martz, the CFO of UPC Insurance. I'm pleased to review UPC's financial highlights and would also like to encourage everyone to review our press release and investor presentation for more information.

The highlights for the fourth quarter included, first, solid top line growth with premiums written increasing nearly 16% and gross premiums earned totaling $308 million. For the year, gross premiums earned grew to just under $1.2 billion, an increase of 20% year-over-year. Second, UPC saw significant improvements in its underlying results. Our underlying combined ratio was 81.3%, an improvement of over 6 points from the same period a year ago, driven by positive movements in both the underlying loss and expense ratios. This helped bring our underlying combined ratio down to 89.1% for the year, which is up almost 4 points year-over-year due to catastrophe losses being 5 points higher in 2017.

Third, UPC had a core loss of $1 million or $0.02 a share, a decrease of $34 million from the prior year due primarily to catastrophe losses of $41.7 million or $0.72 a share compared to only $1.4 million or $0.02 a share in the same period a year ago.

For the year, UPC had core income of $16.5 million or $0.38 a share, which declined $18.4 million from the prior year, primarily from a $24.2 million decline in merger and amortization expenses before tax.

Finally, UPC experienced favorable income tax adjustments in both the current periods and the prior period as well as the change in the federal effective rates year-over-year, so the company's results before income tax provide a much clearer measure of performance. For example, if you take UPC's fourth quarter loss of $19.4 million and add back the catastrophes of $41.7 million, which are not comparable year-over-year as well as the net investment losses of $12 million, which are nonoperating, you get $34.3 million of income before tax. That's a 20% increase over the prior year using the same calculation.

Similarly, for the year, a similar result occurs if we compare our income before tax and just remove the net investment losses, which are almost all unrealized. UPC's pretax income also increased from $843,000 in 2017 to $3.4 million in 2018. This year-over-year improvement is inclusive of all cat losses, which are comparable for the full year.

In short, management feels the true earnings power of the business remains strong, despite all the items impacting comparability, and we believe it's reasonable that margins will improve further in 2019.

Additional details regarding UPC's total revenue for the quarter beginning with direct premiums written, they consisted of 71% personal lines and 29% commercial lines. Commercial lines grew 19% year-over-year, slightly faster than personal lines at just under 15%. Roughly 59% of our growth in direct written premiums came from Florida, and the Northeast remained our fastest growing region, up 16% year-over-year led by New York.

Assumed commercial excess and surplus lines premiums grew 122% to $22.9 million during the quarter, a 17.1% change in ceded earned premiums for the quarter was slightly higher than the 12.4% growth in gross earned premiums due to lack of any quota share sessions for the 1 month of December 2017.

Investment income increased 42% year-over-year to $7.5 million in the quarter.

Realized gains of $2.3 million and unrealized losses from equities of $14.3 million resulted in a $12.6 million decline in revenue for the quarter and $7.6 million for the year, due to the new GAAP accounting rule change John mentioned previously.

Other revenue decreased $6.6 million or 63% year-over-year, due to the change in our presentation of ceding commissions earned implemented during the second quarter of 2018. The ceding commissions earned during the quarter were $10.7 million.

Moving on to losses. UPC's fourth quarter losses increased $50 million or 69.4% from $72.1 million last year to $122.1 million this year due to a $9.7 million or 13.7% change in non-cat losses consistent with our premium growth and a $40.3 million increase in catastrophe losses. This produced a gross loss ratio of 39.6%, up 13 points year-over-year and a net loss ratio of 67.2%, up nearly 24 points from last year.

Net retained cat losses during the current quarter added 13.5 points to the gross loss ratio and 23 points to the net loss ratio. Hurricane-related losses totaled $28.2 million, and the remaining $13.6 million was due primarily to the increased retention of non-Hurricane events under the company's aggregate reinsurance program.

Reserve development on prior accident years of $8.5 million added nearly 3 points to the gross loss ratio and 5 points to the net ratio during the quarter. For the year, this was $4.3 million or about 0.4% on total reserves of nearly $200 million and a base -- premium base of $1.2 billion gross earned, which is not very significant.

Despite this development, UPC saw favorable trends in non-cat loss ratio by accident year across all lines of business, both inside and outside of Florida, with the biggest improvements coming from personal lines in Florida. Excluding the impact of net retained catastrophe losses and reserve development, UPC's gross and net underlying loss ratios improved nearly 3 points compared to the same period a year ago.

UPC's non-loss operating expenses decreased $5.9 million or 7.2% year-over-year during the quarter, driven primarily by an $8.5 million increase in amortization expense related to our 2017 merger with American Coastal. However, underlying expense presents more comparable result. After adjusting for ceding commissions, it increased of $1.1 million or 1.4% year-over-year. The underlying gross expense ratio improved 2.5 points to 24.6% and the underlying net expense ratio improved over 3 points to 41.7%.

Moving to our balance sheet. UPC ended the year with total assets of over $2.3 billion, including nearly $1.1 billion of cash and invested assets. At December 31, the duration of our fixed maturities declined to 3.5 years, while yield to maturity improved to 3.15%, and 100% of our holdings were investment-grade with an overall composite writing of A+. Unrestricted liquidity at the holding company was approximately $71 million at the end of the year and shareholders' equity attributable to United shareholders decreased to $520.2 million with a book value per share of $12.10 and $12.31, excluding accumulated other comprehensive income. Lastly, tangible book value per share, excluding OCI, increased over 3% despite occurring approximately $100 million of catastrophe losses during 2018.

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

Thanks, Brad. It was not a very satisfying 2018 for you or for us. Much higher-than-normal cat activity sapped our earnings. But even while processing almost 100,000 claims, about 4 years' worth during 1 year, we continued to build a strong and diversified franchise. 2019 is off to a good start relative to the past couple of years in terms of cat activity. So we feel optimistic that the investments and operational improvements we have made have a good chance to help us produce much better results in 2019 and beyond. We appreciate your support for UPC, as we continue to move forward. That concludes our remarks.

And we're happy to take questions at this point.

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

My first question, can you give us where Hurricane Michael losses were booked for the quarter on both on gross and net basis?

Elyse, this is Brad. Hurricane Michael, for the quarter, was booked at $128 million and net was $27 million.

Okay. And then so was the remainder of the cats in the fourth quarter really just related to the how the retention works on your reinsurance program? Or were the other -- were there other smaller events?

Yes, there were about $4 million worth of new events during Q4 that were truly new and the remaining little $9.6 million, $9.7 million was related to the increased retention. It was related to event -- the events from prior accident quarters in 2018.

Okay, perfect. And then the unfavorable development in the quarter, the $8.5 million or so, can you just give us a little bit more color on what that stemmed from? I'm assuming most likely from the accident year '17, but if you can just get a little bit more color there, that would be helpful.

Yes. We missed on the most immature accident quarters from 2017 Q3, Q4 of last year. So we had to take a more conservative approach to our development factors this year. I mean, the primary driver was Florida non-cat homeowners' severity. We're actually seeing lower frequency and the rate changes we've implemented are, obviously, helping the accident year loss ratio improvement we described and showed in the investor presentation. So we remain pretty optimistic about the trends, but we obviously, missed on our expectations development.

Okay. And then you mentioned like rate changes, you guys also mentioned a bunch last quarter as well where you were discussing some kind of the one-off non-cat losses. Can you give us an update maybe specific to Florida in some of the rate -- is there more rate that you guys are looking to take as we think about 2019?

We are looking to take more rate in Florida. We have a rate filing pending. So you'll continue to see that occur. But as we mentioned, our non-cat loss indications for the year in Florida were down 5 points year-over-year. So we feel good about how we're positioned.

Okay. That's helpful. In terms of the tax rate, there was some true-up that impacted the current quarter. Do you have an outlook for how we should think about the tax rate for 2019?

Outlook on tax rate remains unchanged at 26%. You're just going to see some unusual results when you have low levels of income, given the size of some of our temporary differences. So we understand the frustration there trying to make sense of the tax results, but posting stronger book income relative to taxable income will help correct that.

Okay. And then my last question, as you placed part of your reinsurance program to start the year and then also some of it comes up midyear. As you get closer to midyear, are you guys anticipating making any significant changes to your outbound reinsurance purchase this year?

Well, the purchase -- -- there's slightly more reinsurance to account for the growth but the structure that we've employed has served us so well over the last couple of years that we don't anticipate any major changes in the structure, and we're in the midst of discussions with all our major partners right now about the exact layering and pricing. So it's business as usual in terms of insurance placement. We have very strong partners and we're working with them right now to get the placement done.

Our next question comes from the line of Marcos Holanda with Raymond James.

So Elyse touched on some of the questions I wanted asked, but I guess just on the underlying combined ratio target of 85%, obviously, being above -- or below the 5-year average I was just hoping you guys could give us some more color how you -- how is the company set up to achieve that? And if there's a time frame for it?

Time frame is immediate. We expect to hit that target and price our products accordingly each and every year. Obviously, there's volatility and uncertainty in our business and that's reflected in that history. But time frame is immediate.

And I would say, it really is the 5-year average that we've had. It's a couple of basis points off and there's some distortion in last year's underlying combined ratio relative to '17 because of the effects of the different sessions in each year under our quota share and the effects of the unwinding of the DAC that goes along with the merger that we did with American Coastal. Those distort things. When you look at underlying stuff, if you take it all quota share sessions, our underlying -- our cat loss ratio gross, before any sessions to reinsurers, went down significantly. So the underlying book of business is performing at a level that supports that underlying combined right now. And so it's not -- it doesn't even suppose any improvement in our underlying results to get to that, if that makes sense.

Yes. And then another one on the Journey sub. You mentioned in your remarks you guys already wrote a business for it with AmRisc, but I think you said it was an admitted policy. And I always thought the whole rationale for the rating was to get on the non-admitted side of the business. Is that reasonable? Or you guys are just planning on writing that type of business in 2019?

Journey is an admitted market company and always has been. That -- the play on Journey is not to get into the surplus line space. We've accomplished that through BlueLine. The plan on Journey was to get into different markets on the personal lines side and different products under commercial lines side. And that's what we've done. The first policy that we wrote with the Journey was a commercial lines admitted market apartment building in Florida, which typically has gone to E&S markets because apartment lenders require an A category, A.M. Best rating. We now have an admitted market A category, A.M. Best rating in Florida, which is kind of a category buster and gives us a really nice advantage.

Okay, great. And then just lastly, do you guys think the losses in the retro market will have any meaningful impact on your insurance pricing when it comes to renewals?

Time will tell. We're -- obviously, there's been a lot of stress in the reinsurance market. You all know that as well as we do. But the partners that we do business with are looking at the long term like we are. And over the long term, we expect our partners to make money not every year just like over the long term our results are going to be a lot better than they've been in 2018 and '17. So yes, there's been some pain on the reinsurance side, and we want our insurance partners to feel like they have a profitable long-term relationship and that it's a win-win. So that's why I said, we're working with them right now to try to find a fair way to do it.

(Operator Instructions) Our next question comes from the line of Christopher Campbell with KBW.

I guess, my first question just kind of following up on the leases about the unfavorable development. So it sounds like that's the most recent accident year. So I guess, how is that going to factor in to your core loss ratio picks for 2019?

As I mentioned it's going to have a trickle-down effect to the most immature accident quarters.

But it's immaterial really in the scheme of things. On our overall loss ratio, it's 20 basis points something like that, if that. I mean, it's just not a material number, and it was a sort of a prudent year-end thing for us to do. But again, as I said, the non-cat loss ratio picks factoring all that in, in Florida, are 500 basis points lower year-over-year. So we're seeing a material improvement in the business and an immaterial amount of development for the year doesn't impact that.

Got it. And just, yes -- I understand it's immaterial, but I guess just where was the development coming from? Is that kind of more like -- are you seeing AOB creep back into like the core business or anything like that? Just any other color you could get or any other color you can get on?

No, AOB is not as significant factor for us as we've talked about before. We've been reducing. We've never had a lot of business in Tri-County. We don't -- haven't written any new business in Dade since I've been at this company 6.5 years ago, we stopped writing new business in Broward some time ago, we've been non-renewing policies down there. Our premiums are up 30% or 40% down there. And our loss ratio -- non-cat loss ratio in the Tri-County year-over-year 2017 to '18 was down 12 points, 1,200 basis points, 12 full percentage points of non-cat loss ratio. So no, that's not what's driving it.

Exactly. And again, I got to reiterate, 2018, we feel like we're as well reserved as we've ever been. So we're taking all this information into account and setting year-end reserves on the current accident year as well. So we don't expect that to continue, and I have no concerns about the development whatsoever.

Okay. Got it. That's really helpful. I guess another one on the reinsurance cost. It looks like the CD premiums were up to 40% versus 36.7%, I guess, a year ago. So I guess, just -- could you unpack that on what's driving that increase? Is it more coverage? I guess, just how should we think about like the higher cost in terms of what more United is getting for that?

It's a full 12 months of the commercial residential business produced by American Coastal, is what it is. Last -- in 2017, we only had 9 months of that. The commercial res has a higher ceding ratio relative to the personal lines, as you might expect. So that's the change.

And the other change is that there wasn't any quota share in place.

Just 1 month.

For 1 -- for month of December 2017. So we had 1 full month [more] of 20% sessions on our quota share in 2018. So no, we're not paying more if there's some comparability issues.

Okay. Got it. That makes sense. And then just -- I was looking at the slide deck that you guys had. Was there any more Irma loss creep? Because I think the last one number I had for you guys was like $747 million. And then Slide 18 of the presentation has like a number $900 million. So is $900 million is the new number for that?

It's not very new, but it's been -- it's the number from a couple of months ago.

Okay. So $900 million is your latest gross number of Irma, correct?

Yes.

Got it, got it, just wanted to confirm that. And then I was just wondering a little bit on switching to Michael, I know you guys had a big range like the $50 million to $120 million gross originally. Now it's only like $8 million above that is the $128 million. I guess, are you seeing the -- any signs that Michael could have loss creep similar to Irma? Are you seeing like the attorneys making their way up north or anything like that?

We're not seeing any evidence of that on our book.

Okay. Great. And then just one other -- yes, just kind of a question about like just the collateralized piece. I know -- like I think I asked the question last quarter about just in terms of, I guess, you guys release collateral and I understand it's not a commutation. I think you said losses would have to develop like twice as much for that to like matter. So I guess just how -- do you need to plug that going into the next program because the collateral is released? I mean how does that work in terms of that piece of the program is like -- is the reinsurer already using that to write new business because you don't think that the losses are going to hit that? I guess it's buffer table question in essence. But I guess, just if releasing that collateral, the reinsurers are going to start using that to write, how does that impact your program? And then what you have to purchase going forward?

It hasn't impacted us at all, the collateralized programs have worked exactly as they were designed to work and exactly as they were advertised. There's buffer tables that allow collateral release after certain periods of time. If losses develop up into those areas where collaterals was released, reinsurers are obligated to post new collateral and we claw it back. That's worked multiple times on Irma and with -- flawlessly within a matter of days. And so we don't have any concerns about the collateralized reinsurance or how it works and the partners that we deal with have access to a lot of capital. So they're not strapped for cash and trying to beg and borrow to make ends meet. They have capital to support their past obligations and their future obligations. And so we haven't seen any signs of distress from our reinsurance partners on the collateralized side.

Got it. And is there any concern on the reinsurer side just in terms of the loss creep and then having to like maybe return collateral after it's been released on a buffer table? Is there any concerns on the reinsurer side like maybe they wouldn't want to participate on our program going into next year or they would have a higher rates if that were an issue?

Nobody has enjoyed the Irma loss creep at all. Obviously, the numbers have gone up significantly for the industry as a whole over a long period of time and that's not something that anybody planned on. For us, our losses on Irma, as a percent of our market share in the affected areas, are still less than they should be than our market share at the PCS number. And so relatively speaking, we performed well on Irma. It doesn't mean that we've enjoyed it or that our reinsurers have enjoyed paying losses that far after the fact, and everybody's got to factor that in to how they price their products going forward. So that's how it works, and we all have to figure out what exactly that means.

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

Okay. Well, thank you so much, everybody, for joining us on the year-end call. We really appreciate your interest. We appreciate the good questions, and we look forward to continued dialogue over the rest of 2019. So thank you again.

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