Q1 2022 United Insurance Holdings Corp Earnings Call

Okay.

[music].

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 its now my pleasure to turn the call over to Karen Daily Vice President with the equity group. Please go ahead.

Thank you Kevin and good morning. Good afternoon, everyone. UPC insurance has also made this broadcast available on its website at www Dot UPC insurance Dot 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 investors section of the company's website.

Speaking today will be chairman of the board and Chief Executive Officer Art, Daniel Pete and President and Chief Financial Officer Bennett Bradford Martin.

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 an accurate or if other risks.

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 and the risk factors 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 Peed Jan.

Thanks, Karen and.

Hello, and thanks for joining us on our first quarter earnings call.

Dan Pete Chairman and CEO of UPC insurance.

I'm planning to offer an overview of some of our activities and then Mark 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 Tcs events.

And higher loss severity on both Attritional and Cat claims.

Revenues for the first quarter reflect our aggressive derisking and deleveraging 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 rates.

Also we continue with exposure management activities in our remaining core portfolio, which decreased by nearly 14% on a year over year basis.

But exposure management reductions were generally offset by rate increases on both 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 leading ratios are up from 59% to 68%.

With quota share up five eight points and other which is mostly cat excess of loss of $3 five fleets.

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 premiums.

Losses were impact impacted by modestly elevated catastrophe events in the first quarter as well as increased severity due to litigation and inflation on both cat and non cat 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 three.

Wow.

Lower frequency offset by increased severity.

The cat loss ratio was down significantly from 29% to 13%.

Due in part to winter storm here last year, but still elevated over long term averages.

Expenses were reduced in line with direct written premium reductions in 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.

Top of the 11, 5% achieved in 2021.

Combined with our insurance to value initiatives 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.

Within 11 6 million pre tax income for the quarter.

For commercial lines, our premium was up by 22, 7% year to date, while Tid is just under a 4% increase.

We announced in April that we have filed applications with the Florida only or to merge journey insurance company into American coastal insurance company to support the growth in ACI 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 six one cat treaty renewal is progressing on track with most of the lower layers committed and.

In total capacity needed down dramatically due to the portfolio Derisking discussed earlier.

For Florida litigation, we continue to see the number of initial lawsuits down significantly from the peak rate for June 2021. However.

Escalating pre suite notification of intent to litigate it is less certain the access of litigation in Florida will continue to decelerate due to Spi 76.

There is now 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 Derisk and deleverage 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.

Increased rates are earning their way through the portfolio and we expect to continue with rate increases or at least the middle of 2023.

Our commercial lines business is positioned for profitable growth with a market leading position in our specialty commercial niche and one of the hardest markets over the last 20 years.

With that I'll turn it over to Brad Martz to discuss more specific numbers.

Thank you Dan and Hello. This is Brad <unk>, President and CFO of UPC insurance 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 highlights.

Highlights for the quarter ending March 31.

2022 included a GAAP net loss of $33 2 million or <unk> 77, a share compared to a net loss of $17 8 million or <unk> 41, a share last year and a core loss of $29 3 million or <unk> 68, a share compared to a core loss of $19 4 million or <unk> 45, a share a year ago.

On page four of our Investor presentation highlights that our core loss included <unk>.

$98 6 million current accident year, net retained cat losses, and $1 4 million.

Prior year Reserve development, driven primarily by cat events cat losses in the current quarter stemming from 10, new PCF 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 personal lines portfolio as well as the cancellation of all policies in New Jersey consisted.

With our plans to transfer that business to HCI group.

Pages, six and seven of our Investor presentation continues to demonstrate that we are getting significantly more rate.

Both in commercial lines and personal lines, while keeping the risk we want.

Page eight of our Investor presentation provides a summary of our business in force at March 31, with and without the states with exited to demonstrate continued progress toward a more balanced risk portfolio.

Ceded earned premiums were $218 3 million, a decrease of $7 6 million or three 6% year over year due primarily to more business being ceded via the 100% quota share reinsurance program for the northeast and southeast regions and the 25% structured quota share placed at year end. These sessions are partially.

By ceded losses in ceding Commission income, which reduced total expenses for the quarter.

Other items included in total revenues during the first quarter were $3 1 million of fee income 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 personal lines 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 or 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 of prior year Reserve development, adding one five points on those same ratios.

Our underlying loss and loss adjustment expense of $61 3 million down 728000, or one 2% year over year.

That produced an underlying net loss ratio of 68%, 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 that 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 it does provide a page nine of our Investor presentation. Excuse me provides an update on litigation trends in our personal lines business, including the sharp increase of precede 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 and.

An example of how we use mosaiq to segment, our Florida each of the three book as shown on page 11 of our Investor presentation, and clearly indicates why do we believe that by focusing appropriate underwriting actions on the bottom quartile of our portfolio. We can deliver improved personal lines results with about 73% of our.

In forest personal lines 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 our personal lines risks being renewed or at no less than 100% of the current replacement cost estimate that is indexed for inflation monthly we referred to this as our insurance to value or ITV initiative and when combined with our rate changes it has been.

Turning 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 ceding 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 ceding commissions.

In comparison to gross premiums earned.

That being said our net expense ratio did increased approximately six points to 53, 8% inclusive of reinsurance costs.

Speaking of our insurance 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 <unk>.

But this year the limit needed. This year is significantly less due to our de risking efforts and our retention is unchanged at 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 31 included total assets of $2 4 billion, including cash and investments of approximately $909 million, which decreased $56 1 million or five 8% from year end.

Modified duration of our fixed income holdings decreased three eight years with an overall composite rating of AA and yield to maturity increasing to $2 86%.

GAAP equity attributable to UHC stockholders declined approximately 17, 4% to $258 million.

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 intangible book value per share by approximately <unk> 59 after tax.

That story 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 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.

Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.

Formation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment will be necessary to pick up prehensile 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.

Great good afternoon.

I guess I'm going to have two questions. The first question will.

Focus on slide eight which is.

Your reduction in your policies in your premium in your Tid.

The second question will be on reinsurance costs. So.

And looking over slide eight.

If we take the states that you're no longer in.

We're still seeing pretty rapid sequential decline in policies, Florida for example, down six 9%.

From end of year to March 31.

Is this sort of rate and change rate of change in.

The shrinkage of your policy count is that is that sort of a good run rate to think about for the balance of the year as you continue your derisking efforts.

Okay.

I can take that this is Dan.

Yes, so you have.

Personal lines adjusted there are six 6%.

And on a on a discount that is probably.

In line with the run rate.

But noticed that the.

The premium is not dropping at the same rate because of the rate increases so our premium wouldnt be going down at that rate the premium would be going down at a lesser rate.

That makes sense and then it also makes sense that <unk> is going down at the same rate because you're readjusting. Your <unk> is.

Is there is there any hope that you and some of the smaller states can.

Can more rapidly exit or is that yet.

Is there a regulatory considerations that are holding you back.

Okay.

I.

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 Okay and then.

Hey, Thanks for the color in your on Slide 12 about your reinsurance program and then I was looking at the press release.

When you talk about reinsurance cost as a percentage of gross earned premium.

And I know the final details aren't available for the program yet.

Directionally can you give us a sense of.

How the costs, how those ratios might look.

The back half of the year or any color on what's going on there would be helpful.

Hi, Greg 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.

Essentially change our outlook so.

I would.

I appreciate the inquiry, but.

My guidance.

We will attempt to provide as much color as we can.

As early as we can.

Once once we've got.

We're close to or closer to fully bounded on the program, we know with certainty what those costs are but right now we're still.

In the middle of the market.

Eisman and negotiations with the market. So I don't think it would be appropriate to comment on on the expectation of price direction.

I guess that makes sense.

I didn't even touch the.

Florida Special session, but given the staff you throw on page nine I think provides.

Yeah.

Some compelling evidence that maybe we will do some.

Okay.

Thank you.

Thank you Greg.

Next question is coming from Bill <unk> from Teton Capital. Your line is now live.

Thank you I'd like to pick up on the on the special session.

Would you please discuss the.

The items that.

Are on the agenda and what potentially you are hearing that legislatures would like to come out of that session.

Okay Bill. Thanks This is Dan.

I'm not exactly sure what specific items or are on the agenda. I know there are several things that have been.

Kicked around either in the past are associated with this and it includes.

Potentially a change in the.

The Florida Hurricane.

Catastrophe climbed attachment point is one of them.

One of the things that is specifically needed is some way to deal with the roof covering issues.

Okay.

And.

So.

Let's see.

Got it.

So the.

You'd mentioned the roof covering issues in addition to.

Thanks, Yes, so roof covering <unk>.

Feeling with the actual cash value versus the replacement cost value.

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 Sp's 76.

And how that impacted the litigation.

And it would apply and how it applies.

Sorry, that's not a great answer but.

We do expect that theyre going to have.

Some negotiations going into that recession that we are completely uncertain of what comes out of it.

No that's fair Dan. Thank you do you have a sense, whether there is a consensus.

In the legislature that they want to limit the litigation, particularly.

Particularly the frivolous litigation or.

At this point.

And awareness that the industry is overburdened, then and theyre going to explore options to to assist from.

From multiple angles.

Again, Bill I think a hard question to answer because.

Yes.

Certainly.

The commissioner of insurance has suggested that that there is excessive or frivolous litigation.

But having said that the.

The legislature has worked for years to try and find them.

Solutions to that but they have not seemed to be able to come to a conclusion. However.

There is a growing consensus that something needs to be done.

Otherwise the Florida insurance spaces is.

Becoming very hospital to reinsurance.

Great. Thank you.

Thank you. Thank you. Thank you we reached end of our question and answer session I would like to turn the floor back over for any further or closing comments.

Okay.

Well, thanks for joining us on our call and that'll wrap up our call for today I want to thank all of our entire team for their tireless efforts and thanks to all of you for joining our call today.

Thanks again.

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.