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spk02: Hello, and welcome to the United Insurance Holdings Corp. First Quarter 2022 Financial Results Conference Call and Webcast. 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 the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Karen Daly, Vice President with the Equity Group. Please go ahead.
spk00: Thank you, Kevin, and good morning, good afternoon, everyone. UPC Insurance has also made this broadcast available on its website at www.upcinsurance.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of UPC's earnings release and presentation in the investor section of the company's website. Speaking today will be Chairman of the Board and Chief Executive Officer, R. Daniel Pede, and President and Chief Financial Officer Bennett Bradford Martz. On behalf of the company, I'd like to note that statements made during this call that are not historical facts are forward-looking statements. The company believes these statements are based on reasonable estimates, assumptions, and plans. However, if the estimates, assumptions, or plans underlying the forward-looking statements prove inaccurate, or if other risks or uncertainties arise, Actual results could differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results to differ materially may be found in our filings with the U.S. Securities and Exchange Commission in the risk factor section of our most recent annual report on Form 10-K or subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made and, except as required by applicable law, we undertake no obligation to update or revise any forward-looking statements. With that, it's my pleasure to turn the call over to Mr. Daniel Pede. Dan?
spk05: Thanks, Karen. Hello, and thanks for joining us on our first quarter earnings call. I'm Dan Pede, Chairman and CEO of UPC Insurance. I'm planning to offer an overview of some of our activities, and then Brad Marks will provide some more specific numbers. The first quarter had a core loss of $29.3 million, which reflects a reduced net earned premium combined with elevated catastrophe losses from 10 PCS events and higher loss severity on both attritional and CAT claims. Revenues for the first quarter reflect our aggressive de-risking and de-leveraging activities over the last 18 months. Gross earned premium on a year-over-year basis is down by approximately 10%. due in part to the sale of our Northeast renewal rights. Also, we continue with exposure management activities in our remaining core portfolio, which decreased TAV by nearly 14% on a year-over-year basis. But exposure management reductions were generally offset by rate increases on both our personal lines and commercial lines portfolios. Our net earned premium is down just over 30%, again due in part to the 100% quota share treaties associated with the sale of the Northeast and Southeast renewal rights, as well as increased reinsurance spend to enhance our hurricane protection through reduced retention levels on both a per-occurrence basis as well as an aggregate basis. As such, seeding ratios are up from 59% to 68%, with quota share up 5.8 points and other, which is mostly CAD excess or loss, up 3.5 points. While losses are down 21.4 million or 21% year over year, the net loss ratio is up significantly due to the 30% reduction in net earned premium. Losses were impacted by modestly elevated catastrophe events in the first quarter, as well as increased severity due to litigation and inflation on both CAD and non-CAD losses. If we look at our performance on a direct written premium basis, The non-cat loss ratio was down slightly from 32.4% to 32.3%, while lower frequency offset by increased severity. The cat loss ratio was down significantly from 29% to 13%, due in part to Winterstone URI last year, but still elevated over long-term averages. Expenses were reduced in line with direct rate and premium reductions, and the direct expense ratio was up only slightly, from 27.9% to 28.0%. On the underwriting activity side, we continue to achieve compounding rate increases. In personal lines, we achieved average rate increases across our core portfolio of 17.9% in the first quarter, on top of the 11.5% achieved in 2021. Combined with our insurance to value initiative, average renewal premium across the portfolio increased 26.6% and is expected to continue to accelerate throughout the remainder of this year. The commercial lines portfolio continues to perform well, with an 11.6 million pre-tax income for the quarter. For commercial lines, our premium is up by 22.7% year to date, while TAV is just under a 4% increase. We announced in April that we have filed an application with the Florida OIR to merge Journey Insurance Company into American Coastal Insurance Company to support the growth in ACIC and to better allocate capital between the statutory companies. This is progressing according to plan. The application is pending and we expect to close subject to regulatory approval in the second quarter. We continue to make progress towards our goal of a 50-50 balance between personal lines and commercial lines. moving from 63-37 at the end of last year to 61-39 at the end of the first quarter. Brad will discuss further, but our 6-1-CAT treaty renewal is progressing on track with most of the lower layers committed and total capacity needed down dramatically due to the portfolio de-risking discussed earlier. For Florida litigation, We continue to see the number of initial lawsuits down significantly from the peak rates of June 2021. However, with escalating pre-suit notification of intent to litigate, it is less certain the excessive litigation in Florida will continue to decelerate due to SB 76. There is now a planned special session of the legislature scheduled to convene on May 23rd to address property insurance issues. In summary, first quarter results reflect the transition to de-risk and de-leverage our portfolio, resulting in significantly decreased gross and net earned premiums, which combined with elevated catastrophe losses and increased severity. We are continuing to take compounding rate actions, as well as risk selection and exposure management actions. The increased rates are earning their way through the portfolio, and we expect to continue with rate increases through at least the middle of 2023. Our commercial lines business is positioned for profitable growth with a market-leading position in a specialty commercial niche in one of the hardest markets of the last 20 years. With that, I'll turn it over to Brad Martz to discuss more specific numbers.
spk03: Thank you, Dan, and hello. This is Brad Martz, President and CFO of UBC Insurance. Please 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. Highlights for the quarter ending March 31, 2022 included a gap net loss of $33.2 million, or $0.77 a share, compared to a net loss of $17.8 million, or $0.41 a share, last year, and a core loss of $29.3 million, or $0.68 a share, compared to a core loss of $19.4 million or 45 cents a share a year ago. On page four of our investor presentation, highlights that our core loss included $28.6 million of current accident year net retained CAT losses and $1.4 million of prior year reserve development driven primarily by CAT events. CAT losses in the current quarter stem from 10 new PCS events with estimated gross losses of approximately $43 million that were all within our $15 million retention, but subject to recovery from our quota share reinsurance, reducing the net amount retained. Gross premiums written for the quarter of $279.5 million declined $32.2 million, or approximately 10%, and gross premiums earned of $319.2 million decreased 11% due to the continued exposure management in our personalized portfolio as well as the cancellation of all policies in New Jersey, consistent with our plan to transfer that business to HCI Group. Pages 6 and 7 of our investor presentation continue to demonstrate that we're getting significantly more rate, both in commercial lines and personal lines, while keeping the risk we want. Page 8 of our investor presentation provides a summary of our business in force at March 31st. With and without the states, we've exited to demonstrate continued progress towards a more balanced risk portfolio. Seeded earned premiums were $218.3 million, a decrease of 7.6 million or 3.6% year-over-year due primarily to more business being seeded via the 100% quota share reinsurance programs for the Northeast and Southeast regions and the 25% structured quota share placed at year-end. These sessions are partially offset by seeded losses and seeding commission income, which reduce total expenses for the quarter. Other items included in total revenues during the first quarter were $3.1 million of fee income that decreased $6.1 million year-over-year due primarily to the renewal rights sale for the Northeast region included in the prior year, along with lower policy fees as we decrease our personalized policies written. Net investment income of $2.5 million declined year-over-year due to lower invested assets, and net investment losses of $1.8 million were caused by fixed income sales during the quarter needed to meet liquidity needs, as well as unrealized losses from equity securities of $2.3 million. UPC's first quarter net loss and loss adjustment expense was $91.4 million, a decrease of $24.4 million, or 21% year-over-year. The current accident year CAT losses added over 28 points to our net loss and combined ratios, with the impact per year reserve development adding 1.5 points on those same ratios. Our underlying loss and loss adjustment expense was $61.3 million, down $728,000, or 1.2% year-over-year. That produced an underlying net loss ratio of 60.8%, which was up roughly 18 points compared to last year. And as Dan alluded to, the increase can be attributed mainly to inflation-related increases in loss severity and higher notices of intent to litigate pending claims. We also believe that corrective underwriting actions and non-renewal notices also had an adverse impact on loss costs for the quarter compared to a year ago. Page five of our investor presentation summarizes our results by line of business and continues to show profitable results for commercial lines, but the weather-related losses, inflation, and litigation issues in Florida led to disappointing personal lines results year over year. Page nine does provide Page 9 of our investor presentation, excuse me, provides an update on litigation trends in our personalized business, including the sharp increase of pre-suited notices of intent to litigate. Underwriting profit continues to be the primary focus of our leadership team, and page 10 of our investor presentation summarizes our top priorities to achieving that. First is harnessing the power of our proprietary risk selection tool called Mosaic. An example of how we use Mosaic to segment our Florida HO3 book is shown on page 11 of our investor presentation and clearly indicates why we believe that by focusing appropriate underwriting actions on the bottom quartile of our portfolio, we can deliver improved personalized results with about 73% of our in-force personalized business already achieving underwriting profitability. Second, is our fight against inflation, which comes in two forms, rate and coverage increases. Last year, we implemented new controls to ensure that 100% of all personal lines risk being renewed were at no less than 100% of the current replacement cost estimate that is indexed for inflation monthly. We refer to this as our insurance to value or IPV initiative. And when combined with our rate changes, it's beginning to have a significant uplift on rate adequacy in personal lines. UPC's operating expenses were $54.3 million, a decrease of $15.7 million, or 22.4% year-over-year. This decline was driven mainly by higher seating commission in the current quarter, which is reflected in lower policy acquisition costs and driving a favorable comparison to gross premiums earned. However, our direct Expense ratio shown on page five of our investor presentation, as Dan mentioned, was basically unchanged at 28% once you exclude the effect of seating commissions in comparison to gross premiums earned. That being said, our net expense ratio did increase approximately six points to 53.8% inclusive of reinsurance costs. Speaking of reinsurance, page 12 of our investor presentation shows our projected 2022-23 core catastrophe reinsurance program. We have secured virtually all of the limit needed in the first three layers where market capacity is very limited. And we found approximately 75% of the 2.2 billion of limit projected at June 1st. The limit this year, the limit needed this year is significantly less due to our de-risking efforts and our retention is unchanged approximately 15 million. But the structure is changing from an aggregate program to a more traditional occurrence-based approach. We expect the program to be finalized in early June and plan to issue a press release with more details once complete. Our balance sheet as of March 31st included total assets of $2.4 billion, including cash and investments of approximately $909 million, which decreased 56.1 million or 5.8% from year end. The modified duration of our fixed income holdings decreased to 3.8 years with an overall composite rating of A and yield and maturity increasing to 2.86%. Gap equity attributable to UIHC stockholders declined approximately 17.4% to $258 million with a book value per share of $5.96 and tangible book value per share of $3.86. Rising interest rates caused our accumulated other comprehensive income to decrease by $25.7 million, which impacted book value per share and tangible book value per share by approximately 59 cents after tax. Statutory policyholder surplus at the end of the first quarter was approximately $285 million. And it's also worth noting the company received regulatory approval to terminate its intercompany pooling agreement which improves our ability to potentially raise additional capital to support American Coastal's profitable commercial lines growth going forward. That concludes our prepared remarks. We thank you for your continued interest and are now happy to take any questions.
spk02: Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it will be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Greg Peters from Raymond James. Your line is now live.
spk01: Great. Good afternoon. I guess I'm going to have two questions, and the first question will focus on slide eight, which is, your reduction in your policies and your premium and your TIV. The second question will be, you know, on reinsurance costs. So in looking over slide eight, if we take the states that you're no longer in, we're still seeing, you know, pretty rapid sequential decline in policies. Florida, for example, down 6.9% from end of year to March 31st. Is this sort of rate of change in the shrinkage of your policy count, is that sort of a good run rate to think about for the balance of the year as you continue your de-risking efforts?
spk05: I can take that. This is Dan. Yes, so you have a personalized adjusted there, 6.6%. And on a TIF count, that is probably in line with the run rate. But notice that the premium is not dropping at the same rate because of the rate increases. So our premium wouldn't be going down at that rate. The premium would be going down at a lesser rate.
spk01: That makes sense. And it also makes sense that the TIVs isn't going down at the same rate because you're readjusting your TIVs. Is there any hope that you, you know, in some of the smaller states can, you know, can more rapidly exit or is that, you know, is there regulatory considerations that are holding you back?
spk05: Remember that we have 100% quota share behind those smaller states. So what you see written there is basically passed directly through to HCI on the renewal rights sale. Got it.
spk01: Okay. And then thanks for the color on slide 12 about your reinsurance program. And then, you know, I was looking in the press release, you know, where you talk about reinsurance costs as a percentage of gross or in premium. And I know the final details aren't available for the program yet, but, you know, directionally, can you give us a sense of you know, how the costs, you know, how those ratios might look, you know, in the back half of the year or any color on what's going on there would be helpful. Hi, Greg.
spk03: This is Brad. That's a great question. We have some visibility into that, but I don't think it would be appropriate to comment at this time given all the uncertainty around the special session in Florida. they could potentially change our outlook. So I would, I appreciate the inquiry, but my guidance would be we will attempt to provide as much color as we can, you know, as early as we can. Once we've got, we're closer to fully bound on the program, we know with certainty what those costs are, but right now we're still uh in in the middle of the market um placement and negotiations with with the market so i don't think it'd be appropriate to comment on on the expectation of price direction i i guess that makes sense i you know i i didn't even touch the florida special session but you know given the stats that you throw on page nine i think provides you know
spk01: some compelling evidence that maybe they'll do something. Thank you.
spk02: Thank you. Thank you. Next question is coming from Bill DeZellum from Taiton Capital. Your line is now live.
spk04: Thank you. I'd like to pick up on the special session. Would you please discuss the items that are on the agenda and what potentially You're hearing that legislatures would like to come out of that session.
spk05: Okay, Bill, thanks. This is Dan. I'm not exactly sure what specific items are on the agenda. I know there are several things that have been kicked around either in the past or associated with this, and it includes potentially a change in the The Florida Hurricane Catastrophe Fund attachment point is one of them. One of the things that is specifically needed is some way to deal with the roof covering issues. And so, let's see, I lost my train of thought. So the... You'd mentioned the roof covering issues in addition to... uh thanks yeah so roof covering just dealing with the actual cash value versus the replacement cost value there's potentially a roof deductible type of provision that would apply a roof deductible to non-hurricane wind and then of course if they were to get in and try to work a little bit more with the litigation from the perspective of the sb 76 and how that impacted the litigation, when it would apply, and how it applies. I'm sorry that's not a great answer, but we do expect that they're going to have some negotiations going into that session, but we are completely uncertain of what comes out of it.
spk04: No, that's fair, Dan. Thank you. Do you have a sense at whether there is a consensus in the legislature that they want to limit the litigation, particularly the frivolous litigation? Or at this point, there's just an awareness that that the industry is is overburdened and they're going to explore options to to assist, you know, from multiple angles.
spk05: Again, Bill, I think a hard question to answer because, you know, certainly commissioner of insurance has suggested that, that there is excessive or frivolous litigation. Um, but having said that the, you know, the legislature has worked for years to try and find, um, solutions to that, but they've not seemed to be able to come to a conclusion. However, I think there is a growing consensus that something needs to be done. Uh, uh, otherwise the Florida insurance space is, is, um, becoming very hostile to insurance.
spk04: Great. Thank you. Thank you. Thank you.
spk02: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
spk05: Okay. Well, thanks for joining us on our call, and that'll wrap up our call for today. I want to thank all our entire team for their tireless efforts, and thanks to all of you for joining our call today. Thanks again.
spk02: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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