Q3 2021 United Insurance Holdings Corp Earnings Call
Greetings and welcome to the United Insurance Holdings 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.
Now I'll turn the conference over to our host Adam prior of the equity group. Thank you you may begin.
Thanks, so much and good afternoon, everyone. Thank you 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.
The company has made an accompanying presentation available on its website.
Come to contact our office at 202, and 369606 and we'd be happy to keep a copy.
In addition, UPC insurance has made this broadcast available on its website as well.
Before we get started I'd like to add that read the following statement back at 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 in the company and mechanics of the company and subsidiary.
Right.
Actual results from UPC may differ materially from those results anticipated in these cool okay.
As a result of risks and uncertainties, including those described from time to time.
Filings with the U S Securities and Exchange Commission UPC, specifically disclaims any obligation to update or revise any forward looking statements.
Thats, the new information future developments or otherwise.
With that I'd now like to turn the call over to Mr. Dan Pete Upc's Chief Executive Officer. Please go ahead Dan.
Yeah.
Thanks, Adam.
Hello, and thanks for joining us on our third quarter earnings call I'm, Dan Pete Chairman and CEO of UPC insurance.
Planning to offer an overview and discussion of some of our activities and then Brad Martin who will provide more specific numbers and then we'll take questions.
The third quarter results are inline with expectations and reflect continued execution of our 2021 transition plan.
This plan is to reduce our gross and net hurricane exposure through increased reinsurance exposure management and reduced catastrophe retention levels.
Knowing that this is going to drive an increased reinsurance spend.
In <unk>, we see the increase in net ceded earned premiums which impacts our core earnings ex hurricane.
Down about 6 million year over year.
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 T. A V and continuing personal lines is down year to date by 13, 4%.
But it's another 5% in Q4 for an annual reduction near 20%.
We expect to continue exposure reduction through at least September 30 of next year 2022.
And anticipate at least a 10% decline in tid for personal lines next year.
On the front end, we continued to drive compounding rate increases in nearly all states with a third quarter record average of 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 and three Q.
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 continued to perform well with premium year to date up nearly 19%, which while P&L exposure is down.
On American coastal we have a market leader in Florida commercial residential that's a dozen years of expertise underwriting that portfolio.
American coastal is positioned extremely well to grow profitably and one of the hardest Florida market 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.
For 2022, we plan to maintain our exposure levels in commercial lines approximately flat.
And we anticipate an average 15% to 20% rate increase and therefore, a 15% to 20% premium increase.
Profitable profitable underwriting doesn't just include rate increases and exposure management and it also includes risk selection.
We have implemented many underwriting changes, including the development of Mosaiq technology technologically advanced risk management algorithm that will be applied to new and renewal business to identify loss drivers.
We are supplementing these types of underwriting tools with increasing physical inspections and underwriting actions are unacceptable or increased risk levels.
<unk> between risk levels can drive a significant decrease in combined ratios.
A key component of our long term formula for success as we drive toward becoming a top quartile underwriting company.
Brad is going to comment on Florida Senate Bill 76, which was effective July 1st of 'twenty, one, but I'll offer that at least initially.
Seen a drop from a peak in June at 840 lawsuits to approximately 400 per month in September and October.
While it remains too early to quantify the impact on reserves.
It does appear to have at least stopped the runaway escalation.
The precinct notification provisions enable a settlement in many cases and should be good for both insurers and insurance.
There is significant cost savings and the reduced the reduction of litigated claims.
Statistics suggest in Florida at 91% of payments made in litigated claims were made to the plaintiffs.
Attorneys.
The current insurance market continues to be firm as it has in years in the Florida market is expected to remain hard for an extended period of time, especially for personal lines and commercial residential.
Our 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 ROE in 2023.
With that I'll turn it over to Brad Martz.
Yeah.
Okay.
Thank you Dan and Hello, This is Brad Martz, President and CFO of UPC insurance.
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.
Quarter ended September 32021, UHC reported a GAAP net loss of $14 3 million or 33 cents 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.
$15 5 million or 36 cents, a share to our underlying core earnings, which excludes catastrophe losses and prior year reserve development, which declined roughly $6 million or <unk> 14, a share year over year. The decline in core earnings as Dan mentioned was primarily driven by higher reinsurance costs associate.
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 UHC is moving in the right direction.
Gross premiums written for the quarter declined $43 3 million or approximately 12% due to continued intentional exposure reductions 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.
Ceded earned premiums were 200 million.
A decrease of $34 9 million or 21% year over year, due primarily to more business being ceded via quota share reinsurance programs.
Whereby those sessions are partially offset by ceded losses and ceding Commission income earned.
Other items included in total revenue during the third quarter.
Or $3 7 million of fee income, which declined slightly due to fewer personal lines policies in force investment income of $3 5 million, which declined about two and a half million dollars 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.
We're $3 3 million versus $11 5 million a year ago.
Yes.
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 Idaho was the most significant loss event in the quarter, representing $18 million of the 37 million of net catastrophe losses incurred.
<unk> added over 24 points to our net loss and 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.
Here, you will see a stark contrast between our personal lines in our commercial lines businesses that we're working hard to correct.
Page seven 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 since results.
We firmly believe that getting more rate 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 eight through 11 of our Investor presentation provides 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, providing some more insight on our litigation experienced in Florida during the current period.
As you'll see since peaking in June new.
New lawsuits have declined significantly which is partially offset by an increase in claims following the new pre suite 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 loss cost or loss reserves.
The early indications of successful speed resolution are encouraging.
Upc's operating expenses were $76 3 million a day.
Increased to $16 1 million or 17% year over year.
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 increased approximately eight tenths of a percent.
49, 8% inclusive of ceded premiums.
On the balance sheet, UPC assets totaled $3 3 billion, including cash and investments.
Oh.
$1 billion $160 million.
The modified duration of our fixed income holdings decreased to three nine years with an average overall composite rating of eight plus at September 30th.
Reinsurance recoverable and loss reserves increased primarily as a result of our estimated ultimate direct and ceded losses for Hurricane Ida.
GAAP equity attributable to <unk> stockholders declined approximately 19% from year end.
$324 million with a book value per share of $7 42.
And tangible book value per share of $5.28.
Unrestricted liquidity at the holding company was approximately 36 million at quarter end.
That concludes our prepared remarks, and we're now happy to take any questions.
Yeah.
Thank you and.
Ladies and gentlemen at this time, we will conduct a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate that your line is in the question queue.
You May press the star followed by the number two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Yeah.
Our first question comes from Greg Peters with Raymond James Please state your question.
Hi, good afternoon.
I would like to focus first on.
Your comments stand that your ultimate objective is to get to I think you said, a 50 50 mix of personal lines and commercial lines is that is that does that.
Right and did you put a time period on when you might get there.
Yes.
That's been our plan for this year.
We said three years are approximately three years and we are moving in that right direction.
With their retention it seems like I mean, even though you use.
Sort of limited in how much you can nonrenewed.
And it seems like your retention ratios are holding up pretty well despite the rate action.
You know I think you listed inner boroughs the potential sales that are there. Other operations you are looking at are states that youre considering.
More aggressive actions on.
Our exposure management.
Clam.
<unk> has several different levers that we can that we can use them in the various different states and each state is somewhat different as you know also we sold the renewal rights to the Ford Northeast States.
With a with a quota share treaty behind that December 31st of last year. So that's reduced our exposure significantly on.
On the commercial side.
You can do a lot more stuff with deductibles and specific buildings.
Buildings and distance to the coastal and those type of exposure management.
So we're considering all of those and.
And also for our planning for next year like I said, we planned to be down by at least 10% more by September 30th of of next year.
And when I think of it I I noticed you said that and you said also I think one of the slides do you expect to return to profitability next year.
Yes, you know when I think about you you've done a great job with exposure management and you know you've your reinsurance is protected you from these big named storms, but.
And the first and second quarter of this year and then certainly last year you've been affected by these the proverbial Kitty cat storms.
How should we think about that for the first half of next year, maybe maybe that's more.
Wrapped up into a discussion of higher reinsurance renewals coming.
Yeah. So we do have exposure in the first and second quarter to the two what we call <unk>.
Oh credit cat.
That tended to be more so.
In the northeast, which is one of the reasons that.
That we have exited most of the northeast.
Step four in a row in New York.
We.
We actually in Europe. This year, we had a loss, but we were protected pretty well by R. L. P Cat tower.
We are planning at the moment to.
Renew that that tower, 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.
Several times.
It's really too early to say how that our reinsurance renewal is going where we're working on it yeah.
Yeah I'm I'm.
I figured as much.
Yes, just the last question is you know, we're we're watching just from a big picture perspective.
You know the the slow moving train wreck that's happening in the autos auto insurance space too because of inflation reduced our.
Increased frequency severity and some of the companies some of the specialty companies in that market.
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, when I think about it.
At least on you're doing fine on the commercial side, but on the personal line side. It feels like you know.
There should be.
And I'm sure you guys have looked at it.
Why why can't you just stop writing new business altogether or you know are.
You've cut your commission rates, how can you affect the inflow of new business more dramatically.
<unk>.
So in the near term until the profitability, Yes, we said good good question.
And I think we have our new business flow is down.
Two of about 5% of what it was.
A year ago, a year and a half ago. So we've effectively almost shut off new business to the accounts that do make it through our generally very very nice accounts.
You know everything you would think new roofs, and good valuation a good rate.
And so we have almost we have almost stopped on new business and Oh.
And most of the categories and we have stopped on new business and in some specific exposure zones that we don't like such as inland risks and stuff like that.
So we are we're very aware of that and and almost all of our premium is coming out of <unk>.
This inquiry.
Interest rates on our renewal business.
Got it well.
The commercial business, certainly had a great quarter and year.
And hopefully that will continue as we look to 'twenty, two and 'twenty three.
Yes, the commercial businesses as you know I've been involved with that for.
A dozen years.
And it is especially.
Hum.
Tractive in a firming in the hard market and obviously we are.
Coming into them 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 the 2006.
So we expect that to go well.
Well through 'twenty, two and 'twenty three.
Makes sense thanks for the answers.
Yep. Thank you.
Thank you and once again to ask a question press star one on your telephone keypad.
To remove yourself from Q Press Star two.
Our next question comes from Bill <unk> with T N capital. Please state your question.
Thank you I have two questions first of all what led to the modest unfavorable 1.9 million pretax or prior year reserve adjustment.
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.
You know.
It was.
Not systemic throughout the portfolio just to just a few events and remember we're getting dozens and dozens of these non hurricane events on top of Hurricanes, but all our reserves for the name when storms last year.
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.
Great. Thank you Brad and then Dan I think you mentioned that you are 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.
Sure.
So we're kind of in a continual state of redoing, our reinsurance treaties, but so are a L. P cat treaty.
It comes up January 1st.
And we also renew part of our quota share as well as part of our cat excess.
So from a general perspective, our view is to have a.
With cat, which is hurricane cat, which is the easiest to describe.
At the moment and that's mainly to June one.
Treaty renewals, so we arent fully into that but at the moment, we're very happy with our COO.
Retention, we have $15 million per event and we've put on top of that of $31 million aggregate for our pooled companies.
And in this case like with Aida It hit not only Louisiana, but it continued on and up through.
New York, where we have a 3 million dollar retention in our.
And she broke insurance company in New York, So that's where the 18 comes from either.
But obviously, Idaho as a.
There.
A significant event.
And we felt like that retention was good there on a O P cat.
We are starting with the same framework.
That we had last year.
Again, we think that served us pretty well in Erie.
And this is just something that we have to underwrite against we 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 'twenty one.
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 it would be $31 million and yet I think he had 37 million.
Here, we would you would you talk about that that gap. Please.
Yeah, and just to be clear.
With our words, so we have a pool groups. That's three of the company's American coastal family security in UPC.
And that has.
$31 million aggregate, but it applies to.
Named storms.
And there was a three and a half million dollar.
So a very small storm may not get into that pool.
Some of them that you'd never even really hear about but then also like I mentioned, we had 3 million in.
Inter borough that was not part of that pool and then we also had a retention and journey insurance company, which is not part of that pool.
So those those.
Miscellaneous ones and in some ways, it's smaller hurricanes can add up just as fast or faster than the large hurricanes, which run into our protection.
That's very helpful and so as you think about that does that.
Alter your thinking about next years.
<unk>.
Next year's retention or are you are you comfortable accepting that it sounds like roughly $3 million.
Per our per smaller event in some of these are non pool of companies.
Hmm.
I would say, it's a 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 of $1 million or so.
That can be almost like another fire or.
Another thing they get reported in accumulative basis.
But.
They impact our income statement more like a like a large fire does.
Great. Thank you for taking the remedial question.
Oh no problem.
Yeah.
Thank you and a reminder to ask a question press star one on your phone now we will pause for a few moments, while we pull for questions.
Thank you. Your next question comes from Greg Peters with Raymond James Please state your question.
Hey, guys.
One other follow up.
I mean tell but just you know.
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.
Hi, Greg This is Brad.
So on a net basis, you are probably going to see it very comparable to two this quarter.
It's unlikely we will move away from.
The quota share in the short term, but depending on how much we see that that's going to obviously have a significant.
The impact on the net expense ratio.
So our preference is always to point to the direct or the gross expense ratio, which.
It has been a trend.
Trending favorably.
And we might see a slight improvement.
Hum of up to a point next year, but again, that's going to be dependent upon our our overall premium volume.
When when the agent.
Cutting of commissions, you know have a favorable effect on that as we think about next year.
Yes that is part of why we have an outlook for.
A reduced.
Spence ratio on a direct basis, but again, depending on our our capital needs and how much premium we're seeding reinsurance costs can be very distortive to that so on a net basis.
That that may get washed out, but on a direct basis absolutely.
Got it alright, thanks for your answers.
Okay.
Thank you and once again to ask a question press Star one.
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.
Okay. Thanks 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.
Thank you that concludes today's call all parties may disconnect have a great evening.