This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Greetings and welcome to the United Insurance Holding Corp. Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Adam Pryor of the Equity Group. Thank you. You may begin.
spk01: Thanks so much, 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 on its website. You're 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 as well. 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 full-looking statements within the meaning of the federal securities laws, including statements relating to trends and the company's operations and financial results, and the business and the products of the company and its subsidiaries. Actual results from UPC may differ materially from those results anticipated in these full-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. Dan Peed, UPC's Chief Executive Officer. Please go ahead, Dan.
spk06: Thanks, Adam. Hello and thanks for joining us on our third quarter earnings call. I'm Dan Peay, Chairman and CEO of UPC Insurance. I'm planning to offer an overview and discussion of some of our activities and then Brad Marks will provide more specific numbers and then we'll take questions. The third quarter results are in line with expectations and reflect continued execution of our 2021 transition plan. This plan is to reduce our growth in that hurricane exposure through increased reinsurance, exposure management, and reduced catastrophe retention levels, knowing that this is going to drive an increased reinsurance spend. In 3Q, we see the increase in net seeded earned premium, which impacts our core earnings, ex-hurricane, down about $6 million year over year. But we also see significantly reduced hurricane retention with approximately $30 million this year versus $125 million in 2020. As we go forward, we can capture the increased reinsurance spend in our rate filings which will continue to earn through the portfolio in 2022 and 2023. On the gross exposure reduction, our TIV in continuing personal lines is down year-to-date by 13.4%. We expect about another 5% in Q4 for an annual reduction near 20%. We expect to continue exposure reduction through at least September 30th of next year, 2022, and anticipate at least a 10% decline in TIV for personal lines next year. On the front end, we continue to drive compounding rate increases in nearly all states, with a third quarter record average of a 13.8% across the entire personal lines renewal business portfolio. Over the last four quarters, we have increased premiums on like-for-like renewal business of approximately $100 million, with a record $31.7 million in 3Q. Rate increases are expected to continue compounding in the low to mid-double-digit range through at least the end of 2022. Despite these rate increases, our renewal retention, excluding the non-renewed accounts, remains over 89%. Commercial lines continue to perform well, with premium year-to-date up nearly 19%, while PML exposure is down. In American Coastal, we have a market leader in Florida Commercial Residential with a dozen years of expertise underwriting that portfolio. American Coastal is positioned extremely well to grow profitably in one of the hardest Florida markets since 2006. Our plan is to continue moving the book towards a 50-50 balance between commercial and personal lines over the next three years. And for 2022, we plan to maintain our exposure levels in commercial lines approximately flat Then we anticipate an average 15% to 20% rate increase and, therefore, a 15% to 20% premium increase. Profitable underwriting doesn't just include rate increases and exposure management. It also includes risk selection. We have implemented many underwriting changes, including the development of mosaics. a technologically advanced risk measurement algorithm that will be applied to new and renewal business to identify lost drivers. We are supplementing these types of underwriting tools with increasing physical inspections and underwriting actions for unacceptable or increased risk levels. Differentiating between risk levels can drive a significant decrease in combined risk as a key component of our long-term formula for success as we drive toward becoming a top quartile underwriting company. Brad's going to comment on Florida Senate Bill 76, which was effective July 1st of 21, but I'll offer that at least initially we've seen a drop from a peak in June of 840 lawsuits to approximately 400 per month in September and October. While it remains too early to quantify the impact on reserves and rates, it does appear to have at least stopped the runaway escalation. The pre-suit notification provisions enable a settlement in many cases, and should be good for both insurers and insureds. There is significant cost savings in the reduction of litigated claims. As statistics suggest, in Florida, 91% of payments made in litigated claims were made to plaintiffs and defense attorneys. The current insurance market continues to be as firm as it has in years, and the Florida market is expected to remain hard for an extended period of time, especially for personal lines and commercial residential. UPC, we continue working through our 2021 transition year, again, with third quarter results in line with expectations. We expect to return to profitability in the fourth quarter of this year and continue to move towards a strong underwriting profit in 2022 and achieving targeted ROEs in 2023. With that, I'll turn it over to Brad Martz.
spk02: Thank you, Dan, and hello. This is Brad Marks, President and CFO of UPC Insurance. First, happy Veterans Day to all our American heroes. We thank you for your service. I'm pleased to review UPC's financial results, but encourage everyone to review our press release, investor presentation, and Form 10-Q for more information regarding the company's performance. For the quarter ended September 30, 2021, UIHC reported a gap net loss $14.3 million, or $0.33 a share, compared to a loss of $74.1 million, or $1.73 per share last year. On page five of our investor presentation, you'll see a reconciliation of our core loss of $15.5 million, or $0.36 a share, to our underlying core earnings, which exclude catastrophe losses and prior year reserve developments. which declined roughly $6 million, or 14 cents a share year over year. The decline in core earnings, as Dan mentioned, was primarily driven by higher reinsurance costs associated with our stated objective of reducing leverage and protecting capital. I'm proud of the hard work and good progress our team is making on taking care of policyholders in the wake of new catastrophe losses this quarter. And I believe our third quarter showed several positive signs that UIHC is moving in the right direction. Gross premiums written for the quarter declined $43.3 million, or approximately 12%, due to continued intentional exposure reduction throughout our personal lines portfolio. We are reducing risk exposure at a faster pace than the reduction of our top line, which is a good thing. And gross premiums earned were basically flat year over year at $353 million for the current quarter. Seated earned premiums were $200 million, A decrease of $34.9 million, or 21% year-over-year, due primarily to more business being seeded via quota share reinsurance programs, whereby those sessions are partially offset by seeded losses and seeding commission income earned. Other items included in total revenue during the third quarter were $3.7 million of fee income, which declined slightly due to fewer personalized policies in force, Investment income of $3.5 million, which declines about $2.5 million due to lower yields, and dividend income from a smaller common stock portfolio. Investment gains of $5.5 million were down from approximately $25 million last year, and unrealized losses from equities were $3.3 million versus $11.5 million a year ago. UPC's third quarter net loss, and loss adjustment expense was 102.8 million, a decrease of 115.9 million, or 53% year-over-year. Hurricane Ida was the most significant loss event in the quarter, representing 18 million of the 37 million in net catastrophe losses incurred. CAT added over 24 points to our net loss in combined ratios, which we obviously expect during hurricane season as a catastrophe-focused property underwriter. Our underlying loss in LAE was 63.8 million, down 19 million or 23% year over year. This produced an underlying net loss ratio of 41.6%, which was down over two points from 43.9% in the third quarter last year. The improvement can be attributed mainly to the good performance of our commercial property business. Page six of our investor presentation breaks down our results for the current quarter and year. Here you will see a stark contrast between our personal lines and our commercial lines businesses that we're working hard to correct. Page 7 of our investor presentation summarizes the five key underwriting improvement initiatives that the company has been working diligently on over the past year to improve our personal lines results. We firmly believe that getting more rates, being more selective, shedding unprofitable risk, Cutting policy acquisition costs and being more disciplined with agency management is moving the company toward restoring underwriting profitability. Pages 8 through 11 of our investor presentation provide some evidence that our underwriting actions are having the intended result on our risk portfolio and should lead to better results over time. Page 12 of our investor presentation provides some more insight on our litigation experience in Florida during the current period. As you will see, since peaking in June, new lawsuits have declined significantly, which is partially offset by an increase in claims following the new pre-suit notice requirements of Senate Bill 76. It's still too early to say whether or not Senate Bill 76 will have a positive impact on our lost costs or our lost reserves, but the early indications of successful dispute resolution are encouraging. UPC's operating expenses were $76.3 million, a decrease of $16.1 million or 17% year over year. This decline was driven mainly by higher seating commission income in the current quarter, which is reflected in lower acquisition costs. However, our net expense ratio increased approximately eight-tenths of a percent to 49.8% inclusive of seated premiums. On the balance sheet, UPC's assets totaled $3.3 billion, including cash and investments of $1,160,000,000. The modified duration of our fixed income holdings decreased to 3.9 years with an average overall composite rating of A-plus at September 30th. Reinsurance recoverable and loss reserves increased primarily as a result of our estimated ultimate direct and seeded losses for Hurricane Ida. Gap equity attributable to UIC stockholders declined approximately 19% from year end to $320.4 million, with a book value per share of $7.42 and tangible book value per share of $5.28. Unrestricted liquidity at the Holden Company was approximately $36 million at quarter end. That concludes our prepared remarks, and we're now happy to take any questions.
spk03: Thank you. And ladies and gentlemen, at this time we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Greg Peters with Raymond James. Please state your question.
spk05: Hey, good afternoon. I would like to focus first on your comments, Dan, that your ultimate objective is to get to, I think you said, a 50-50 mix of personal lines and commercial lines. Is that right? And did you put a time period on when you might get there?
spk06: Yes, that's been our plan for this year, and we've said three years, approximately three years, and we are moving in that right direction.
spk05: Yeah. With the retention, it seems like, I mean, even though you're sort of limited in how much you can non-renew, and it seems like your retention ratios are holding up pretty well despite the rate action. You know, I think you listed Interboro, this potential sale of that. Are there other operations you're looking at, you know, or states that you're considering more aggressive actions in?
spk06: Our exposure management plan has several different levers that we can use in the various different states. And each state is somewhat different. As you know, also, we sold the renewal rights to the four northeast states with a quota share treaty behind that on December 31st of last year. So that's reduced our exposure significantly. On the commercial side, you can do a lot more stuff with deductibles and specific buildings and distance to the coast and those type of exposure management. So We're considering all of those and also for our planning for next year. Like I said, we plan to be down by at least 10% more by September 30th of next year.
spk05: And when I think of – I noticed you said that, and you said also I think one of the slides you expect to return to profitability next year. I guess when I think about you've done a great job with exposure management and your reinsurance has protected you from these big name storms, but in the first and second quarter of this year and then certainly last year, you've been affected by the proverbial kitty cat storms. How should we think about that for the first half of next year? Maybe that's more... wrapped up into a discussion of how your reinsurance renewal is coming.
spk06: Yeah, so we do have exposure in the first and second quarter to what we call AOTCAT or credit cat. That tended to be more so in the northeast, which is one of the reasons that we have exited most of the northeast except for Interboro and New York. Um, we, we actually in URI this year, we had a loss, but we were protected pretty well by our ALP cat tower. Um, we are planning at the moment to, uh, renew that, that tower. Uh, although we may have to change things around a little bit down in the, in the bottom layers, because as you've said, that's been hit, uh, several times. Um, It's really too early to say how that reinsurance renewal is going. We're working on it.
spk05: Yeah, I'm figured as much. I guess just the last question is, we're watching just from a big picture perspective, the slow moving train wreck that's happening in the auto insurance space too, because of inflation reduced or increased frequency severity. And, you know, some of the companies, some of the specialty companies in that market have, you know, really laid down the gauntlet, like we're not going to write new business until we get our pricing right. And I guess, you know, when I think about, you know, at least on you're doing fine on the commercial side, but on the personal line side. It feels like there should be, and I'm sure you guys have looked at it, why can't you just stop writing new business altogether? Or you've cut your commission rates. How can you affect the inflow of new business more dramatically for the near term until the profitability is reset?
spk06: Good question. And I think we have – our new business flow is down to about 5% of what it was a year ago, a year and a half ago. So we've effectively almost shut off new business. The accounts that do make it through are generally very, very nice accounts, just everything you would think, new roofs and good valuation and good rate. And so we have almost stopped on new business in most of the CAD areas. And we have stopped on new business in some specific exposure zones that we don't like, such as inland risks and stuff like that. So we are very aware of that. And almost all of our premium is coming out of our renewal business and increased rates on our renewal business.
spk05: Got it. Well... The commercial business certainly had a great quarter and year, and hopefully that will continue as we look to 22 and 23.
spk06: Yeah, the commercial businesses, as you know, I've been involved with that for a dozen years, and it is especially attractive in a firming and a hard market. And obviously we are coming into – I mean, we are in – You know, quite firm market, I believe, one of the hardest markets we're going to see in Florida since 2006. So we expect that to go well through 22 and 23.
spk04: Yeah, makes sense. Thanks for the answers. Yep, thank you.
spk03: Thank you. Once again, to ask a question, press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Our next question comes from Bill DeZellum with TN Capital. Please state your question.
spk00: Thank you. I have two questions. First of all, what led to the modest unfavorable $1.9 million prior year reserve adjustment?
spk02: Hi, Bill. This is Brad. There were a few older catastrophe events that we saw some strange development on, so we decided to do a little bit of strengthening. But it was not systemic throughout the portfolio, just a few events. And remember, we're getting dozens and dozens of these non-hurricane events on top of hurricanes. But all reserves for the named windstorms last year still look good. In fact, we had some redundancy there. but that redundancy benefited the reinsurers. So these are smaller events that were within our retention.
spk00: Great. Thank you, Brad. And then, Dan, I think you mentioned that you're in process of renewing the reinsurance agreement. Would you talk to kind of your objective of the total cat loss exposure this season versus what you are wanting to accomplish for next season?
spk06: Sure. So we're kind of in a continual state of renewing our reinsurance treaties. But so our AOP CAT treaty comes up January 1st, and we also renew part of our quota share as well as part of our CAT excess. But so from a general perspective, our view is to have a I'll start with CAT, which is Hurricane CAT, which is the easiest to describe at the moment. And that's mainly the June 1 3D renewal, so we aren't fully into that. But at the moment, we're very happy with our current retention. We have $15 million per event, and we put on top of that a $31 million aggregate for our pooled companies. And in this case, like with IDA, it hit not only Louisiana, but it continued on up through New York, where we have a $3 million retention in our insurance company in New York. So that's where the 18 comes from in IDA. But obviously, IDA was a very significant event, and we felt like that retention was good there. An AOP CAT... We are starting with the same framework that we had last year. Again, we think that served us pretty well in URI. And this is just something that we have to underwrite against. We may also put in some type of aggregate protections or quarterly aggregate protections, but that is yet to be determined. So in general, our CAT retentions at the moment, we expect to be pretty consistent with where we are right now this year in 2021.
spk00: Thank you. Dan, let me ask one more question from a point of ignorance, if I may, please, that your maximum cat loss that you've talked about this year would be $31 million, and yet I think you've had $37 million here. Would you talk about that gap, please?
spk06: Yeah, and just to be careful with our words. So We have a pooled group that's three of the companies, American Coastal, Family Security, and UPC. And that has a $31 million aggregate, but it applies to main storms. And there's a $3.5 million. So a very small storm may not get into that pool. Some of them that you never even really hear about. But then also... Like I mentioned, we had 3 million in Interboro that was not part of that pool, and then we also had a retention in Journey Insurance Company, which is not part of that pool. So those miscellaneous ones, and in some ways, the smaller hurricanes can add up just as fast or faster than the large hurricanes, which run into our protection.
spk00: That's very helpful. And so as you think about that, Does that alter your thinking about next year's retention, or are you comfortable accepting that it sounds like roughly $3 million per smaller event in some of these non-pooled companies?
spk06: I would say it's a matter of negotiation each year. But the structure that we came up with, we feel protects us from the severe loss. And when you get into the very small and modest losses, a million dollars or so, that can be almost like another fire or another thing. They get reported in a cumulative basis, but they impact our income statement more like a large fire does.
spk00: Great. Thank you for taking the remedial question.
spk04: No problem.
spk03: Thank you. And a reminder, to ask a question, press star 1 on your phone now. We'll pause for a few moments while we poll for questions.
spk04: Thank you.
spk03: Our next question comes from Greg Peters with Raymond James. Please state your question.
spk05: Hey, guys. Just one other detail, but just, you know, we're obviously on seeing some movement in the expense ratio. Maybe can you provide some guidance on how you think that might look next year, either on a gross or a net basis, or both, just to give us some parameters.
spk04: Hi, Greg. This is Brad.
spk02: So, on a net basis, you're probably going to see it very comparable to this quarter. it's unlikely we'll move away from quota share in the short term, but depending on how much we see, that's going to obviously have a significant impact on the net expense ratio. Our preference is always to point to the direct or the gross expense ratio, which has been trending favorably, and we might see a slight improvement of up to a point next year. But again, that's going to be dependent upon our overall premium volume.
spk05: Wouldn't the agent, the cutting of commissions, have a favorable effect on that as we think about next year?
spk02: Yes. That is part of why we have an outlook for a reduced expense ratio on a direct basis. But again, depending on our capital needs and how much premium we're ceding, reinsurance costs can be very distorted to that. So on a net basis, that may get washed out. But on a direct basis, absolutely.
spk04: Got it. All right. Thanks for your answers. Thank you. And once again, to ask a question, press star 1.
spk03: Thank you. There doesn't appear to be any additional questions at this time. I'll turn it back to management for closing remarks. Thank you.
spk06: Okay. Thanks. And with that, we'll wrap up our call for today. I want to thank our entire team for their tireless efforts, and thanks to all of you for joining our call today. So thanks again.
spk03: Thank you. That concludes today's call. All parties may disconnect. Have a great evening.
Disclaimer