Q2 2021 United Insurance Holdings Corp Earnings Call
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I'll now turn the conference over to your host Adam prior of the equity group. Thank you you may begin.
Thank you Alex and good afternoon, everyone. Thanks for joining US you can find copies of Upc's earnings release today at Www Dot UPC insurance Dot 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 212369606, and I'd be happy to send you a copy. In addition, UPC insurance has made this broadcast available on its web site 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 on this conference call constitute forward looking statements within the meaning of the federal securities laws, including statements relating to trends on the Companys operations and financial results and the business on the products of the company and its subsidiaries actual results from us.
<unk> 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.
<unk>, 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. Dante Upc's Chief Executive Officer. Please go ahead Dan.
Thanks, Adam.
Hello, and thanks for joining us on on our second quarter earnings call.
On BNP, chairman and CEO of UPC.
Turning to offer an overview and discussion on some of our activities and then turn it over to Brad Martz on he'll go over specific numbers.
The second quarter results reflect continued execution the execution of our 2021 transition plan.
Plan is to rotate to a dramatically reduced named in non named cat retention level and increased quota share protection.
Both of these to distress capital and reduce volatility.
These actions drive a significantly increased reinsurance spend which reduces our margin during the transition, but subsequently priced into the portfolio.
Anything that we capture the increased price of our reinsurance on our policy premiums.
We continue to stay focused on the steps necessary to achieve a strong underwriting profit.
Beginning in 2022 and continuing to grow in 2023.
Along with reduced volatility at the same time from both our commercial and personal lines businesses.
These steps include compounding rate increases.
Adequate reserving exposure management and enhanced risk selection.
Many of the underwriting actions that we began to take in the second half of 2020 are beginning to flow through as written and subsequently earned premium.
In the second quarter, our personal lines of average rate was again up by $10.4 per cent.
In commercial lines average rate was up by nearly 18%.
Personal lines renewal business premium increased over the last 12 months on like for like accounts by $89.9 million with a record $27 million increase in the second quarter.
Our current filings across all states will yield an average renewal business rate increase in the third quarter of nearly 20%.
And near 15% in the fourth quarter.
Note that these rate increases are compounding on top of at least 1 if not 2 prior rate increases.
Despite these rate increases we have renewal retention rates, excluding non renewals of 96% and personal lines and near 94% commercial loans.
On top of these rate increases we are reassessing the replacement cost estimate of both our personal lines and commercial lines portfolios given the rapid increase in construction and materials costs.
We expect this to on an additional $30 million to $50 million of written premium to the personal lines portfolio over the next 12 to 18 months.
We are shrinking our exposure in personal lines with a T. I D reduction of 5.8% and only the second quarter and on track from a portfolio annual P. M. L reduction of nearly 13% by September 30th share this year.
Just had a major impact on reducing the pressure on our June 1 cat reinsurance placement.
Yeah.
That June 1 extra day, all cat reinsurance placement was very successful and included most of our long term reinsurance partners the range.
Parents tower continues on a strong aggregate cascading basis on.
Offering stronger first event protection than a traditional placement.
We also were able to significantly reduce our hurricane Retentions are first and second event Retentions are 15 million per occurrence.
We buy an aggregate protection for losses in the pool companies at $31 million per the year.
This retention is a significant reduction from the approximately 200 million dollar retention in the 2020 hurricane season.
Effective July 1.2021, Florida adopted Senate Bill 76, which was on insurance reform package that among other reforms designed to protect consumers addressed litigation trends experienced by Florida carriers.
We feel like there are several material changes, which will reduce litigation over time. However.
It is still too early to estimate the impact to loss costs.
Given the July 1 effective date.
Looking forward, we plan to continue to rebalance our portfolio towards a 50.50 mix of personal lines and commercial lines over the next several years.
In the second quarter, our commercial lines direct written and assumed premium is up 18, 4%, while our personal lines direct written premium is down 12, 2%.
See our investor supplement for results broken down by personal lines and commercial lines.
We continue on track towards third quarter launch of Skyway technologies, our managing general agent direct to consumer platform.
Beginning with an <unk> product.
On the technology developed by Skyway will create a new distribution channel for UPC reduced acquisition expenses reached the new generation of insurance buyers and transform how UPC deploys its got on technology resources.
We plan to expand the suite of products offered through Skyway technologies and we are currently developing a strategy to launch H L..3 products in Florida Blue.
Skyway Tech in 2022.
The current insurance market continues to be firm as it has been as firm as it has been in years.
In the Florida market is expected to remain hard for an extended period of time.
Especially for personal lines business.
2021 continues to be a transition year for UPC as we rotate to reduce cat retentions reduced personal line exposure.
But that incurs on additional reinsurance costs and a reduced margin during the transition.
Over as we get through the transition we expect to return to a strong underwriting profit and targeted margins beginning in 2022 and 2 continuing to grow into 2023.
With that I'll turn it over to Brad Martz.
Thank you Dan and Hello. This is Brad Martz, President UPC CFO of UPC insurance I'm pleased to review Upc's financial results, but I encourage everyone to review our press release Investor presentation, and form 10-Q for more information regarding the company's performance.
While we are disappointed by our results. So far this transition year in some respects page 4 of our Investor presentation summarizes good progress we've made delivering on several important strategic initiatives to reduce volatility and improve results. Our response to these challenges in our business.
It's creating a foundation for profitable growth in future periods.
Evidence of this progress includes but is not limited to improvements in our reinsurance program that has significantly reduced our group's net exposure to hurricane risk underwriting actions to ensure rate adequacy and property insurance to value that are expected to fuel significant increases in net premiums.
Reorganization of insurance operations to better connect information technology underwriting actuarial analytics on our cat modeling teams under a common leadership of our CIO, Chris Griffith to ensure data and technology are at the heart of our risk selection and exposure management processes going forward.
And finally, we are proud of formalizing, our ESG strategy and making certain commitments that we expect to improve decision, making associate engagement and our results over time.
For more information on our ESG strategy can refer to page 15 of our Investor presentation and view our full report is available on our website.
For the quarter ending June 30, plus 21 on the company reported a GAAP net loss of $23.5 million or 55 a share.
On page 5 of our Investor presentation reconciles, our core loss of $24.6 million or <unk> 57, a share so our underlying core earnings that exclude cat and prior year development, which declined roughly $6 million from <unk> 14 per share year over year the.
The decline in core earnings was primarily driven by 2 things.
First a $40 million decrease in net premium earned.
Partially offset by an $11 million decrease on policy acquisition costs, resulting from reinsurance strategies designed to reduce operating leverage and retention of risks on our personal lines business.
The 100% session of our business in Connecticut, Massachusetts, New Jersey, and Rhode Island, along with the inclusion of American coastal insurance company in our 23% quota share are the biggest differences in ceded premiums earned year over year.
Second a $16.4 million increase on net loss and loss adjustment expense.
Driven by Cat losses of just over $40 million compared to just under $30 million on the same period, a year ago due to higher gross losses and the absence of our now expired catastrophe aggregate program that seeded approximately $30 million of cat losses in the second quarter of 2020.
Direct premiums written for the quarter were almost flat year over year. Despite a significant decline in total insured values and personal lines, which was offset by strong growth in commercial loans.
6 of our Investor presentation shows our evolving mix by line of business the growth in commercial appear as needed by the change in assumed premiums written that peaked over $104 million in 2018, but decreased approximately $45 million in 2020 and will be zero this year due to those.
Quarter share reinsurance relationships being placed into runoff.
Assumed premiums in the current quarter decreased by $12 million year over year, but that was offset by an increase of approximately $36 million and American coastal commercial residential business that continued to perform very well.
Commercial lines produced core income of roughly $4 million in the second quarter and $12 million year to date. Our results by line of business are shown on page 8 of our Investor supplement.
Earned premiums were $211 million, an increase of $52.3 million or 33% year over year due mainly to more business being ceded vehicle to share reinsurance, which is partially offset by ceded losses and ceding commissions earned.
Other items included in total revenues during the second quarter included $4 million of fee income declined slightly due to reduced personal lines policy count.
<unk> income of $3.7 million, which declined $2.2 million due to lower yields and dividends from our smaller common stock portfolio and unrealized gains from equities of $2.4 million compared to over $20 million a year ago.
Upcs second quarter net loss and LAE was $118.1 million, an increase of $16.4 million or 16% year over year.
Catastrophe losses added nearly 28 points to our net loss and combined ratios, but reserve development was favorable and did not have a significant impact this quarter.
Page 10 of our Investor presentation shows just how challenging the non hurricane all other apparel cat has been during the first half of the year on while gross losses have increased our reinsurance programs have responded to help contain our net losses, but the real long term solution to mitigating cat risk continues to be exposure management.
Excluding these 2 items our underlying loss in LAE was $78.2 million up $5.5 million or 8% year over year.
This produced an underlying net loss ratio of 53, 7%, which was up 14.5 points from 39, 2% in the second quarter last year due primarily to the normalization of frequency and severity of non cat losses that were suppressed by the Covid Lockdown last year.
Page 11 of our Investor presentation also illustrates some of the inflationary pressures we've seen on loss costs in the current accident year.
Upc's operating expenses were $67.9 million, a decrease of $14.8 million year over year, 18%. This decline was driven mainly by higher ceding Commission income in the current quarter, which is reflected in lower acquisition costs. However, our net expense ratio increase roughly 2 points to <unk> 40.
6.7% due to the increase in ceded premiums earned.
On the balance sheet Upc's assets totaled $3.1 billion, including cash and investments of approximately $1.2 billion.
The modified duration of our fixed income holdings decreased to 4.3 years with our overall composite rating of 8 plus being unchanged.
GAAP equity attributable to UHC stockholders declined approximately 14% from year end to $339 million with a book value per share of $7.85.
Unrestricted liquidity at the holding company was approximately $28 million at quarter end net of $17 million of additional capital committed to our pooled group during the second quarter.
And our statutory surplus of our combined group was 294 million at June 30.
That concludes our prepared remarks, and we're now happy to take any questions.
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Our first question comes from Greg Peters with Raymond James. Please proceed with your question.
Good afternoon I guess.
To start things off with on your exposure management strategy.
<unk>.
Dan in your comments that you're targeting by.
By the end of September to have it down 13, or 14% and I'm wondering if there's other levers you can pull to drive it lower.
Further quicker if that makes sense too.
Okay.
Yeah. Thanks, Greg.
So the September 30th because when the.
Like the Florida Hurricane catastrophe fund and other things so that's how.
We kind of measure of exposure for this year and Thats why its been our target.
We did we did target 13% I don't have the numbers right at hand, but I believe we are ahead of pace on that on.
On that target.
That of course is our exposure management of our main personal lines and.
And commercial loans.
John.
But we have done other things such as the.
On the sale for HCI of before northeast States that obviously will reduce our exposure.
In an expedited manner.
And then the other side of that equation as we've discussed this.
The increase or kind of a dramatic increase in our.
Our reinsurance and moving on our Retentions ground.
Like we said from a what was last year about I think $208 million to this year have on an aggregate cooled companies are up $31 million might remember are on target on our first quarter call.
25 million person second event on 70 million aggregate. So we actually improved upon that on that number but those things all are mitigating our exposure.
Right and then you know when I look at your press release.
I think on page 3 talk about you disclose the premium by state.
<unk>.
With what is such a challenging environment in Florida, it's the only state where you're showing positive change.
Pretty sure you're dropping your T. I V. So that's got to be the variances just all right is that right is that the right read on that.
That's right and the and the key thing happening there.
I remember what Youre looking at is that the commercial and personal lines, together and where what we're growing.
Most dramatically from a rate perspective, as our American coastal book, which is 100% in Florida, and so that now that moves those totals what youre seeing there.
Yeah.
I guess just 2 more questions first.
I know.
I think I know what the answer is but I'm just going to have you talked to it in this.
As these the next page on your press release page 4 and this is the table, where you go through the underlying loss in LAE ratios.
On with all the rate that you see.
Thrown at the book.
I was surprised to see such a dramatic deterioration in.
And that ratio on a year over year basis, and I'm talking about the going from 39, 2% last year, and obviously that was probably COVID-19.
I had a favorable on flat on that number but going to 53.7 it seemed like it was running a little bit higher than what I would've ordinarily expected.
Yeah, and I can comment on that and we will say that it's on a higher than we expected.
Obviously.
We watched that underlying ratio is an important.
As an important indicator as to how the book is doing excluding cats and prior year development.
In this quarter, specifically and in this half to some degree both the the non cat as well as the cat claims seem to be.
Bouncing back from the second quarter of 2020 was impacted by Covid by reducing the frequency.
And for that matter severity, whereas the second quarter of 2021.
Seems to have gotten the other end of that.
Of that Slingshot, we have the social inflation, we've discussed with the litigation.
We also have physical inflation.
We added a slide I think on our investor supplement showing like the price of lumber, which I believe are short term.
Supply demand imbalances.
But we're incurring those.
Costs.
Adjusted.
Our claims as we go through the first half of this year.
So I think that I mean, I won't say that that is just an interim thing, but I do think it is being impacted by the rebound from COVID-19.
Got it.
The final question I have is.
The whole groups under tremendous pressure on strain.
Due to the results that everyone's had too.
Deal with.
On capital becomes an important metric here when we think about both gross and earned and I was wondering.
If you could give us an updated perspective on <unk>.
Given you know.
What was a horrible first half, but should be a better second half considering your new reinsurance program can you give us a perspective on how you're positioned capital wise through debt through the end of the year.
Yes sure.
So Brad mentioned that our unrestricted liquidity is about $28 million and that's net of 17 million net was contributed to this debt companies in the second quarter.
Capital raising is something we watch all the time, we worked with the board of directors and and that is under evaluation in it.
1 of our alternatives.
Along with potentially are it increased quota share obviously, the the project Patriot and selling the 4 states.
Distressed debt capital.
On the exposure management that we've talked about being both.
The trimming of our outwards portfolio by 10% to 15%, but also a material increase in on.
Reinsurance premium which of course decreases our net written premium.
We've also announced last quarter that we were exploring the potential divestiture of inner barrel.
These things are all really designed to reduce capital.
Or as you mentioned raise capital.
So I think that Thats under evaluation.
It stays under continuous evaluation by the board.
Got it thank you for your answers.
Thanks, Greg.
Thank you.
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Our next question comes from Elyse Greenspan with Wells Fargo. Please proceed with your question.
Hi, good evening.
My first question is just you know as we think about inflationary trends and higher loss costs that you guys. The Scott.
Do you think about just.
Thinking about the on your line loss ratio kind of trending on.
Throughout the rest of the year.
Yeah, Thanks, Elyse and.
I guess I'll take that 1 on that that's kind of what Greg asked to just now.
We do expect that to trend much more favorably through the second half of this year.
Noticing that our our non named Cat.
Really is all incurred in the first and second quarters are not all but say 90% on them.
It's dramatically reduced in the third and fourth quarters.
Our exposure in the third and fourth quarters as well as the.
Hurricane.
Which we feel that we've kind of corralled given the retentions that we put on our hurricane protection.
So.
We are along with the rate increases I mentioned that we feel like will average.
20% or even slightly over 20% in the third quarter on our personal lines.
And when we combine those we certainly would.
Hope to see that underlying combined ratio go down.
And so as we think about I guess.
Ray eating to earn in on.
I guess can you just help us think interest you're asking me do you expect to see some of the improvement this year and then.
Incrementally more improvement once we get into on 2022.
Yeah, absolutely so we've been.
We've been.
With a about a 10% 10, 4% I think ray average rate increase on personal lines book for.
Probably at least 4 quarters or 5 quarters, it's still kind of escalating from that.
I mentioned, 20% in Q3.
Net reverts, there's some overlapping rate increases in Q3, but then that reverts to about 15% in Q4, and Q1 and Q2 so.
Those will earn through the portfolio.
And we are we are already.
1 to 2 years into this process. It just seems to take a long time, but we actually started quite a while ago.
Lisa This is Brad I would just add page 14 of our Investor supplement lays out a pretty nice roadmap of exactly what Dan is talking about how it's trending and whats the current run rate is.
Okay. That's helpful. And then as you think about I guess.
Just kind of topline growth finally, you got a good amount of <unk> and then kind of you know.
You're rejiggering the businessman how should we think about.
Policy on premium growth kind of trending from here.
Yes, so I think that if you know we should definitely think about 2 things 1 is personal lines business and the others commercial.
So for personal lines, we would expect probably about 10% to 20% reduction.
Due to the exposure management with about a 15% average rate increase through the year, So you're getting about a flat premium on the shrinking exposure base.
Of our personal lines business net and that excludes of course, the 4 states that we have sold in the northeast.
On the commercial lines business, we would expect about a 15% to 20% rate increase we hit 18% this last quarter.
And with a consistent exposure base, so that gives us the top line growth there in the 15% to 20% on the commercial lines.
That's helpful. And then I know last quarter I think you guys had seen some.
On movement here on losses at those kind of on.
Held steady at this point.
Yes, no increase to Irma.
In the second quarter, we feel good with our ultimate and still have.
Approximately $239 million worth of IBM IBM, our reserves on top of a $120 million on a case reserves.
<unk>.
No concerns about our <unk> at the moment.
Okay, and then im assuming quarter to day, it seems like Youre, having Dan.
That much on the cat loss part but.
How do you think recognizing lately you've touched on peak on part D. TV.
At the end of this month, but I think on anything just from a third quarter perspective that you guys are kind of monitoring on on the cat loss side.
Okay.
We've had 1 events.
Elsa.
It impact, Florida, and a few other states, but we've got you know.
On a little less than 300 claims and don't expect it to be a significant event for us.
Okay. That's helpful. Thanks for the color.
Youre welcome. Thank you.
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Okay.
Ladies and gentlemen, we have reached the end of the question and answer session and I will now turn the call over to Dan Pete for closing remarks.
Yeah.
Thank you.
And with that we'll wrap up our call for today.
I want to thank our entire team for their tireless efforts and also thanks to all of you for joining our call today.
Thanks again.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful evening.