United Insurance Holdings' (UIHC) CEO John Forney on Q4 2015 Results - Earnings Call Transcript

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United Insurance Holdings Corp. (NASDAQ:UIHC)

Q4 2015 Earnings Conference Call

February 18, 2016 09:00 AM ET

Executives

Adam Prior - IR, The Equity Group

John Forney - President and CEO

Bennett Bradford Martz - CFO

Analysts

Greg Peters - Raymond James

John Hall - Wells Fargo

Arash Soleimani - KBW

Samir Khare - Capital Returns Management

Edward Hemmelgarn - Shaker Investments

Casey Alexander - Ladenburg Thalmann

Operator

Greetings, and welcome to the UPC Insurance 2015 Fourth Quarter and Year-End Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions].

It is now my pleasure to introduce, Adam Prior of The Equity Group. Thank you. You may begin.

Adam Prior

Thank you, and good morning, 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. 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.

Before we get started, I would like to read the following statement on behalf of 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 related to trends and the company’s operations and financial results and the business and the products of the company and subsidiaries. Actual results from UPC may differ materially from the results anticipated in those 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. UPC specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of the new information, future developments or otherwise.

With that, I’d now like to turn the call over to Mr. John Forney, UPC’s Chief Executive Officer. Please go ahead, John.

John Forney

Thanks, Adam. This is John Forney, President and CEO of UPC Insurance. With me today is Brad Martz, our Chief Financial Officer. On behalf of everyone at UPC, I want to thank you all for joining us today and for your interest in our company.

We ended the year on a strong note, and I want to thank all the men and women of UPC insurance, who have worked so hard to produce these results. And more importantly, to position our company, to achieve our vision of becoming the premier provider of property insurance in catastrophe exposed areas.

The results for the quarter speak for themselves. We produced record top-line and bottom-line results, and Brad will delve more deeply into the financials. But, I'm more interested in sharing with you a few thoughts and metrics, demonstrating our progress on the journey.

Becoming the premier provider of property insurance in catastrophe exposed areas has been our mantra, since I joined the company in June 2012. At the time, we thought there was an opportunity for a company with the right people, the right business model, and the proper capital is to build a billion dollar plus book of business in coastal states, by offering a quality alternative to agents and policyholders in those states.

We thought that the right model would focus on organic growth, geographic diversification, sophisticated exposure management, conservative underwriting, and careful product design, coupled with an aggressive buyer to action in opening and developing new markets. Dynamically conservative, you might say.

Our market research and financial modeling told us that such a company could create a defensible, sustainable market position, while earning returns on equity of around 20% in low cat activity years and between 10% and 15% in high cat activity years. That's the consistent message we have been delivering to investors for the past 3.5 years. In 2015, we validated many of the assumptions, underlying that strategy and business model. Here are a few indicators.

One, agents and policyholders like our products. We wrote over a 109,000 new policies in 2015 compared to 72,000 in 2014, an increase of over 50%. We ended the year with over 347,000 policies in force, and our retention rate was over 90%.

Two, geographic diversification is working. Over 80% of the new policies we wrote in 2015 were outside of Florida and at the end of the year, we had more insured value outside of Florida than we did inside it. And by the way, our underlying loss ratio for the year was lower outside Florida than in Florida. So, we are putting quality business on the books.

Three, our financial and operating model is resilient. Let's do a brief comparison of the past two years. In 2014, we had less than $1 million of cat losses. No big non-recurring expense items and limited costs from system investment. That year, we produced a 22% return on equity. In 2015, we had almost $30 million of net cat losses from a dozen separate events, totaling thousands of claims. We have several million dollars of non-recurring expenses from legacy legal issues, predating my arrival at the company. And we have millions of dollars more in systems investment. The financial cost of these issues, it’s just one element of their impact, we also have a disruptive operational effect, and yet with all those headwinds in 2015, we produced a return on equity of 12.4%, and continue to build strength as an organization. That’s because we have designed and build our company to be anti-fragile, to function well in adversity, and to come out the other side stronger than before. That’s what we did in 2015 and that’s why we are so optimistic about our business in 2016 and beyond.

I look forward to answering any questions you may have at the end of our presentation. But for now, I will turn over to Brad Martz to discuss our financial results in more detail. Brad?

Bennett Bradford Martz

Thank you, John, and good morning. This is Brad Martz, CFO of UPC Insurance.

Before we get to the financial highlights, I would also like to encourage everyone to review our press release from February 17th and Form 10-K that we plan to file on February 25th.

UPC entered 2016 with a tremendous amount of positive forward momentum, by finishing 2015 on a high note with a record setting quarter, in terms of total revenues, net income and shareholders’ equity. I'm proud to share the following highlights of UPC’s fourth quarter.

Gross premiums written of 145 million, up 27% year-over-year. Gross premiums earned of 139 million, 30% growth year-over-year. Net income of $13.8 million, or earnings per share of $0.64, a combined ratio of 85.2, and an underlying combined ratio of 83.1. Book value per share increased to $11.11 per share, up 14% year-over-year and the return on average equity of 12.4%, inclusive of nearly 29 million in catastrophe losses.

The headline for UPC's fourth quarter remains solid organic premium growth. Total revenue grew 31% from 76 million last year, to approximately 100 million, which was the first time, UPC produced total revenues in excess of 100 million during a quarter. Direct premiums written for the quarter increased approximately 39% year-over-year, primarily from well-balanced organic growth, derived 49% from Florida, 22% from the Gulf region, 14% from the Southeast region, and 15% from the Northeast.

Florida grew a modest 4.3% during the quarter. But, Florida direct premiums still represented 7% of our overall year-over-year growth, with the other 93% of that growth continuing to demonstrate UPC’s truly no longer a Florida company. Total policies in force at the end of the year grew to over 347,000, up 38% from the same period a year ago. With the policy mix inside versus outside of Florida of 54% versus 46% compared to 69%, 31% a year ago. Last quarter, we mentioned UPC’s pending entry into Hawaii and Connecticut and as of today UPC is now fully operational in these two new states.

With the addition of New York, expected during 2016, UPC will actively be writing in 12 of the 18 states, where it is currently licensed. UPC’s loss results for the fourth quarter were in line with management’s expectations for each state with no trace of any actual or potential adverse selection as evidenced by a gross loss in LE ratio of 33.1% compared to 29.2% last year, an increase of just under 4 points, roughly 3.2 points or 82% of the increase for the quarter was related to cat losses, which were partially offset by favorable reserve development.

Removing the non-recurring effects of catastrophe losses and reserve development, our underlying loss in LE ratio was 31.7% on a gross basis, and 47.2% on a net basis, with both ratios up approximately 1 point versus the same period a year ago.

For the full year, UPC’s gross and net underlying loss ratios were also very similar to our results in prior years, as outlined in the five-year historical reserve development table included in our earnings release.

During the quarter, the company saw its non-loss operating expenses increased approximately 6.6 million or 24%, 6.3 million of the change was driven by policy acquisition costs, and about 5 million or 80% of the pack or agent commissions, which mostly very directly with premiums.

Operating and underwriting costs declined $656,000 for the quarter, primarily due to the deferral of certain underwriting cost, directly incurred with the successful acquisition of new business, which is a practice UPC will continue going forward, since it results in better matching of revenue and expense. So, it should not be viewed as a one-time item.

The million-dollar increase year-over-year in G&A expense was driven entirely by the depreciation and amortization of IT investments and intangible assets created by the February 2015 acquisition of Family Security Holdings, which was accretive to our 2015 results.

Measuring operating expenses against premium earned, the resulting gross expense ratio of 24.1% was approximately 90 basis points lower than Q4 last year, while the net expense ratio of 35.9% improved by roughly 170 basis points year-over-year.

Management continues to diligently monitor and control operating expenses in the short-term, while also recognizing the importance of making prudent investments in infrastructure and people required to sustain our growth and improve operating efficiency for the long-term. Our balance sheet remains very healthy as UPC ended the quarter with just over 239 million in shareholders' equity and a book value of $11.11.

Our liquidity remained strong with cash and investment holdings increasing by 94 million or 21% year-over-year, to roughly 537 million. Our unrestricted cash available to the holding company was roughly 60 million and the combined statutory surplus of our insurance group at 12.31% was approximately 151 million.

I'd now like to reintroduce John Forney with some closing remarks.

John Forney

Thanks Brad. To paraphrase Bill Belichick it's on to 2016. We like to learn lessons from past experience, but we much prefer to top at the present moment. 2015 provide us ample evidence of the soundness of our strategy and our business model. But also plenty of data points that we have used to make course corrections for 2016 and beyond.

We look forward to continuing our journey to forward a great and enduring company, while delivering strong returns for our shareholders. Thanks again for your time today and your interest in UPC Insurance.

At this point, we would like to begin taking questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Greg Peters with Raymond James. Please proceed, your line is live.

Greg Peters

Good morning, John and Brad. And congratulations on the year.

John Forney

Thank you, Greg.

Greg Peters

If we could just go back and just review a couple of items in your results for the year. Could you talk about maybe the state-by-state results, I look at the remarkable growth you posted in the Gulf region, along with the Southeast region et cetera. And perhaps you could give some color behind, which states you are optimistic about, further growth and what states you're backing off of et cetera?

John Forney

Sure. Well, as I mentioned on during my remarks, our underlying loss ratio outside the state of Florida, this year, it was actually lower than in the state of Florida. So, we're very happy with our underlying loss results in all of the regions and states in which we're operating. As I think everyone one on this call is well aware, we did experience the significant amount of cat losses in 2015, in both the Northeast, primarily in Massachusetts and Rhode Island, and also in the Gulf region, primarily in Texas. So, those affected our results for the company as a whole and for those regions.

Ex-cat losses, the state outside of Florida are contributing proportionally to our pretax profit for the company. So, we don’t see anything that has caused us to change our view that we can target the same sort of net combined ratio outside the state as we are in the state. We get there in different ways, in every state; because premium levels are different, reinsurance seated levels are different in the states. Loss ratios are different in all the states. But so far, we've been able to price our product and distribute our products in ways that leads us to, not want to back off any state, where we are right now, but rather to continue the growth.

In this January, we implemented some new exposure management, proprietary exposure management tools in all of our states that we're using to make sure we're not building any concentrations that would outrun our ability to reinsure those concentrations. We feel very good about those tools that are in place, and we've worked hard for a couple of years to develop those.

So, all systems are go for us in terms of continuing our growth. The Gulf region will continue to be a focus of growth. We think the Northeast will be - have renewed growth this year, as we bring on Connecticut, which just we wrote our first policy this week in Connecticut. As we bring on New York with the Interboro transaction, which we are hopeful we'll close in this quarter. And that will give us a ramp to begin to accelerate our growth in the Northeast. So, the bottom-line is we're not backing off anywhere, we're implementing new exposure management tools, we continue to grow our agency plan and our distribution channels are in very good shape and we're going to continue to grow everywhere in 2016.

Greg Peters

Maybe circle back at this as a different way. In the states that you had catastrophe losses last year, have you gone [ph] at the rate cycle and provide some pricing to recalibrate that or through your exposure management and cat reinsurance program, you think you're covered for 2016.

John Forney

Both. We take in rate in both Massachusetts and Rhode Island. The Massachusetts rate increase was just approved. I want to say last week, 7.9% and we are addressing our rate needs in all of the states in which we operate. But in combination with the exposure management tools that we have in place, we're addressing both cat and non-cat loss situation at where that we operate.

Greg Peters

Okay. All right. Thank you for that. And then Brad and John too, you spoke about the investments you've made in systems and just expenses. And I'm curious and I think you've mentioned the amortization cost as it related to some of those investments. And I'm wondering what we should think about how that investment cycle will look in 2016 as we compare it with 2015.

Bennett Bradford Martz

The investment cycle is definitely slowing. Most of the major investments have been made. The capitalized costs are already on balance sheet. We will continue to enhance and configure those systems overtime. But the bulk of the spending is complete. So, as we've --as that amortization of software and hardware feathers into our income statement that will likely be offset in the second half of 2016 by lower outsourced business processing cost.

Greg Peters

Can you provide some numbers around that Brad?

Bennett Bradford Martz

I'd rather do that offline if you don't mind Greg.

Greg Peters

Yeah. No, I understand. Sure. And I just - just one final question and I'll re-queue. Just if you can step back and just tell us a little bit about what you accomplished with your new aggregate reinsurance contracts in our program that would be - that'd be helpful as we think about the outlook for '16 and '17.

Bennett Bradford Martz

Yes, certainly. I think we did issue 8-K in case anyone missed it. You can read all about it there. But in short, we wanted to minimize some of the exposure to frequency. We experienced in 2015. We thought we had the right reinsurance coverage in place last year. It was a good cover, but it was an occurrence cover and very unusual frequency cost us probably more than we had expected last year, but we've learned from that this aggregate cover will effectively stop our losses at $15 million in the aggregate. So, whether that comes from a single cat loss or a multiple number of cat losses, we can't possibly have a repeat of 2015 from an underlying cat perspective. We affectionately refer those events as kitty cats.

So, this coverage excludes named windstorms, designated by the National Hurricane Center. Hurricanes and tropical storms would still be covered, but obviously by our primary catastrophe program. But, with the amount of limit, we bought was $20 million in excess of '15. So, we'll retain the first '15 then the next 20 is fully transferred. There is a $15 million occurrence limit that supplemented by 10 million excess to 15 covered from Swiss Re. So, in no event would the company experience losses or incur losses in excess of 15 million unless we exhausted the program limit, which is well in excess of 150 of return period according to the expected loss from our models.

Greg Peters

Okay. Thank you for the color.

John Forney

Thanks, Greg.

Operator

Our next question comes from John Hall with Wells Fargo.

John Hall

Good morning, everyone.

Bennett Bradford Martz

Good morning, John.

John Forney

Good morning.

John Hall

I like to follow-up on, I guess Greg's first question in a sense. During the quarter, you transitioned from reporting state-by-state premium growth to, I guess the regional reporting that you're going on right now. And I'm interested as I think I heard Greg also ask just what states are providing the growth that we saw on the quarter and then also just what sort of the rationale for switching over to the regional as opposed to the state-by-state disclosure.

John Forney

Sure, John. This is John Forney. The rationale for switching over is that we're getting to be in a lot of states and it just is pretty messy disclosure to go state-by-state-by-state-by-state, when we are starting to think of our business more in regional terms. Once we close the Interboro transaction, we're going to have our first regional manager who will be responsible for area of the country. We're getting enough scale in these different regions that we can think about our businesses regionally and so we thought it made a lot more sense rather than listing 20 separate states to group things into regions and just so you know what the regions are, Florida is obviously, Florida and that gets own region for the foreseeable future because it's so big.

The Gulf is Texas, Louisiana, Mississippi, Alabama. Right now, we're writing in Texas and Louisiana. For us, the Southeast is defined as Georgia, South Carolina, North Carolina. There is a region that we don't write in yet, which we will call the Atlantic once we start writing there that will be Virginia, Maryland, Delaware. And then the Northeast, we have New Jersey, New York, Connecticut, Rhode Island, Massachusetts.

So that's how we're defining the regions and we are seeing strong growth in all the regions; obviously outsized growth in Texas and Louisiana. In 2015, the Gulf region. Part of that was we rolled on the small acquisition of family security in February 2015 that gave us a jumpstart there in Louisiana. But Texas as you know has been a very strong source of growth for us throughout 2015.

We anticipate growth in all of the regions this year. Our exposure management tools do not indicate that we're reaching levels that concern us in any state with the rate adjustments we've made and we'll continue to make. We always want to have the right way for the right risk. We never attempt to buy business or to have a policy, which is attractive other than for the fundamental value that it provides, the value proposition it provides to agents and the policyholders. So, we expect growth continue everywhere in '16.

John Hall

Great. Thank you. And then you mentioned, Interboro, I thought you'd been operating on the assumption that it was going to be close to being closed now, if not already closed. I guess what's the timing and if it's happening at a slower rate than I might have thought what's holding things back.

John Forney

The New York Department has been working hard to get through the transaction and get it approved and we appreciate their efforts. They have a big backlog of things to work on and I know they're working diligently to get it approved. They have raised zero substantive objections or concerns about the transaction. So, it's just a question of going through their channels. And they've assured us that it’s working its way through. When they started this process, they told us it was a five to six months’ approval process as a matter of course that’s just how long it takes to go through the department and they’ve been true to their word. So, we hope and expect that it will close in March.

John Hall

Okay in March, great. And then, I think you referred the expense ratio Brad in your comments, it seems like it came down faster than we’d expected in your comments. You said something about one-time - not considering it to be a one-time type of the currency, could you just go into a little more depth on that?

Bennett Bradford Martz

Sure. During the quarter, we identified approximately $1.3 million worth of specific underwriting costs, primarily inspections. That are eligible for deferral under GAAP accounting rules. And historically, we have been incurring all of those costs in full immediately and we deem that to be inappropriate on a go forward basis, as we continue to vigorously inspect all of our business.

So, we took opportunity to change our approach there and we want to continue that approach going forward, because we are deferring 100% of our revenue and earning it over the term of each policy. So, that includes policy fees as well as the premium. So, policy fees, some companies treat those differently. There isn’t very good accounting guidance out there for policy fees, but in deferring those, we just felt like it made sense to make sure the cost associated with those revenues were also matched appropriately.

John Hall

Okay. And that’s not a catch up, that $1.3 million is it sort of an ongoing number, a quarterly ongoing number?

Bennett Bradford Martz

Yeah, obviously it depends on how much we do inspections. So, I can’t guarantee it would be that amount in each and every quarter, but yes the point is, we think we should see some expense ratio benefit and improvement as a result of this change.

John Hall

Okay, great. And then before I re-queue, on the loss ratio just any commentary on loss severity or frequency, any underlying trends that you’re seeing?

Bennett Bradford Martz

No discernible trends that concern us. The fourth quarter showed us a slight uptick in frequency, but nothing to be concerned about. Severity was actually down for the quarter and our loss cost per unit of the exposure, which is probably a more prudent way to look at it and then even loss ratio, because it’s measuring incurred losses by earned insurance set a premium which fluctuates with rate changes, actually declined year-over-year as well. So, we feel very good about our loss experience in virtually every state, especially on an underlying basis.

John Hall

And anything for us to consider relative to the first quarter and some of the harsh weather we’ve seen recently here in the Northeast?

John Forney

This is John Forney. When there are cat losses from events that affected Northeast, we will have some impact from that. We’ve been encouraged this year by the very different nature of the storms, for example the record-setting snowfall that occurred in New York City a few weeks ago and in the Northeast, it melted so quickly over the next couple of days that although was a very significant snow event. You could count our claims on one hand, almost literally from that kind of event. So the tenure has been very different so far, but this will not be a cat-free quarter for us that’s for sure, but it won’t rise to the level at least so far based on what’s occurred on as we sit in February 18th, anything close to Q1 of last year.

John Hall

Great. Thanks so much.

Operator

Our next question comes from Arash Soleimani with KBW. Please proceed.

Arash Soleimani

Hi. Thanks. Just wanted to touch base on the expense ratio again. So, I know you said about 1.3 million is from the accounting change, but even with that said, expense ratio still looked pretty good relative to what I think a lot of people were looking for. So, can you quantify, I guess how much of that stems from taking some of the old third-party systems offline or is any of that from some of the scale you've gotten - just want to get a better sense of what's driving the rest of the expense ratio improvement?

Bennett Bradford Martz

I would say, it's primarily on the top-line for them. The significant growth we had in the denominator is really what will be the improvement showing that we can achieve benefit to scale so if we can continue to grow at that kind of pace, you're going to see much quicker improvement expense ratio. I don't - we're not going to give that kind of forward guidance, we had great growth, we have been growing very, very consistently over the past three years, but if I had to point any one thing, I would say that's what's distorting the expense ratio for the quarter.

Arash Soleimani

And can you give us, I guess, a little bit of an update again on those systems, I guess migration. So, you had mentioned I think before that in the beginning of this year is when you would start to bring some of the new systems online. So, how has that been progressing and which third-party systems are now offline? Are there any redundancies still in place or just maybe if you could walk us through that piece of it?

John Forney

Sure. I'll give you a very brief summary. So, there is two major core insurance systems that we have been upgrading to new providers, new technology much more functional, much more scalable. One is our claim system and one is our policy processing system. The claim system migration is complete and the legacy claim system is not functioning for us anymore. We have 100% with our new claim system. The policy processing system, as we discussed that migration will play out over the next year plus. We've started to implement all new states that we right business in Hawaii, Connecticut, Georgia, go on to the new system. But the transition from the existing states where the big bank for the buck is taking the existing states from the legacy systems to the new system, which has not only greater functionality and scalability, but a lower cost that will occur beginning later this year and will then play out over a year after that as we do it probably at renewal.

So, we wanted to make sure the new system was up and functioning, didn't have any big bugs in it, that we worked all that out before we migrate the bulk of our policies in places like Florida and Texas on to it. So, we'll begin that here in Q2 and I will continue the rest of the year and we'll start to see the economic benefits of that pick up as the year goes on into Q3 and Q4 and into next year.

Arash Soleimani

Thanks. And should most of the expense ratio improvement that we'll see going forward, will that be in the G&A line or in the operating expense line?

Bennett Bradford Martz

It will actually be in the pack line.

Arash Soleimani

Okay. That will be in the pack line. And the accounting changes, you said that will show up in which line?

Bennett Bradford Martz

That is operating and underwriting.

Arash Soleimani

Okay. Operating and...

Bennett Bradford Martz

Yeah. And I would give some guidance to make sure that what the classification of some of these is less important than the total expenses, right.

Arash Soleimani

Right.

Bennett Bradford Martz

Whether we lumped pack operating underwriting in G&A all in the one-line item or we broke it into 10-line items, I don't know if getting the individual components right as is important as getting the aggregate expense incurred, right.

Arash Soleimani

Okay. That makes sense.

Bennett Bradford Martz

That's what we're focused on. We will see some comparability issues with prior periods as some of these individual component shift from one category to another.

Arash Soleimani

Sure. And then I just wanted to touch base on Florida a little bit, so I know obviously you had very strong growth outside Florida. So, Florida grew about 4% on a direct basis and it was down about 3% on a gross basis. So, is that stemming just from kind of the soft market in Florida or just heightened competition and not as attractive opportunities that you're seeing in other states, just wanted to just get a sense of what the situation in Florida is, and what your appetite is there.

John Forney

I think you summarized it nicely that increase competitions of soft market not as good of opportunities as we see in other states. We refused to participate in a race to the bottom, which others are eagerly doing. And we are trying to maintain discipline. We love Florida, it's our home, it's still our biggest state. We continue to write a lot of business. We will continue to try to position our products, to be competitive and yet prudent. And we expect to have some - our revised Florida 1.0 product filed here Q1 or early Q2. We think that will help position us to grow in areas that we do not have a significant market presentence now. But for the time being, we're content to buy our time in Florida and grow elsewhere until and unless we see opportunities to put quality business on the books.

Arash Soleimani

And can you talk a little bit about what the - I know you stated it different, but kind of overall outside Florida as the primary rate environment. I guess, how would you compare it to the rate environment in Florida, the outside Florida regions.

John Forney

I don't know that you can generalize. Every state, every region seems to have different characteristics. Obviously, the Northeast, there was a lot of pressure on rates after the winter storm last year. Lots of companies took rate or try to take rate that always create some regulatory and or political concerns, which we saw happened in Massachusetts. So, there is a very different environment there for example then in states where there hasn't been significant cat activity. So, we take it state-by-state. We have a people on the ground in all these states. We try to make sure we understand the competitive regulatory environment, the market environment and get our rates right. So, we take rate where it's appropriate and we don't if it's not.

Arash Soleimani

All right. And just jumping back to Florida real quick. So, I know obviously a few quarters ago, you talked about water mitigation and bid and then it looked like you had some improvements there over the last couple of quarters again. So, there is I think put out some things saying that water losses or ALB losses can four times of severity. And I'm just curious in your book does that seem to correspond to what you're seeing and then how are you able to I guess prevent that from becoming more of a problem if it really a four times severity multiplier.

John Forney

It's clear that ALB issues in Florida have higher severity than non-ALB. It's also clear for our company and then I think for others water losses are the primary cause of loss. Over half of our non-cat losses are from water. So, it's an issue for sure. But it's an issue more so for companies with high density policies in Dade, Broward County, which if you look at the citizen's data have completely outsized results than do other counties. And even Palm Beach which is typically part of the Tri County area has very different results than Dade, Broward. So, we having not participated to a huge degree and take outs do not have a huge concentration in Dade, Broward County. And so, while we certainly haven't been spared the ALB phenomenon, if not merely as severe extreme for us especially in comparison to our book of business as a whole given how diversified we are geographically. Then it would be for companies with high concentrations in Dade, Broward.

Arash Soleimani

Thanks. And lastly, I know you're going to bring Interboro on hopefully, you said in Q1. Did you say something in your opening remarks about, I guess new filings, you'll have in New York separate from Interboro, I guess more detail on that.

John Forney

Yes. Like in Louisiana where we brought Family Security and they have their own product and we also filed the UPC product and they complement each other in the market both have had good growth in 2015 and we're going to keep them alive here in 2016 for the foreseeable future. We have the same intention in New York. We'll have the Interboro product, we will file our UPC product and we will design them so that they complement each other.

Arash Soleimani

And do those who after different customer’s segments or I guess how do you sort of bifurcate those.

John Forney

I think it will be different, in different states. To the extent, we have the situation, the Family Security and UPC products are competitive in different areas of the states. And we're still understanding how our product will compare against Interboro and still finishing the design of our product before we file it, testing it in various areas with different types of customers to make sure that we are not just cannibalizing that business that Interboro would have gotten. Because Interboro's book of business has been well underwritten and produced good results. So there is no reason to take what success at this point.

Arash Soleimani

Okay. Thank you and congrats on the quarter.

John Forney

Thank you, Arash.

Bennett Bradford Martz

Thank you.

Operator

Our next question comes from Samir Khare with Capital Returns Management.

Samir Khare

Hi, guys. Thanks for taking my question. Can you guys hear me?

John Forney

Yes. Good morning, Samir.

Samir Khare

Okay. Good morning. I was wondering if you could give us your weekly or monthly run rate on new business inside and outside of Florida.

John Forney

Well, as I said, we wrote 109,000 new policies in 2015 and we are on a similar sort of rate in 2016.

Samir Khare

Okay. Do you have that for inside and outside of Florida returns?

John Forney

No.

Samir Khare

Okay. And then, your take up success for Q4, I think you guys have send about $16 million of premium. Looking forward do you guys think that United will participate in finances take outs?

John Forney

We always want to be opportunistic that's for sure. It's a small part of our book of business and not a material contributor to our results. But, we do not want to ignore opportunities that might be there. So, this seems continues to be, I believe the number one writer of new business in Florida. So, new policies keep going in there and we'll continue to take a look periodically and see what's in there. It's not monthly part of strategy by any stretch of the imagination. But, I wouldn't be surprised if at some point this year we took another peak and saw if there was anything in that makes sense.

Samir Khare

Okay. And we should think of that as a Q4 phenomenon, not throughout the year?

John Forney

Not throughout the year for us. No.

Samir Khare

Okay. And then any changes to the winter losses on a gross basis either one on paper bill or otherwise in Q4?

John Forney

I'm sorry, any theme changes I think Q4.

Samir Khare

Or the first half winter losses that you guys experienced development?

Bennett Bradford Martz

Just minimal development which was all expected and reserved for so nothing of any concern. So we did have favorable reserve development obviously related to '14 in prior. But development in '15 from the Q1 and Q2 losses obviously continues all of any cat has tail risk associated with it. But nothing that was not expected.

Samir Khare

Sure. And my apologies, if you covered this already. But any reason for the tax rate being lower in the quarter than usual?

Bennett Bradford Martz

Yes, we book some true-ups in Q4 related to our 2014 tax return. It was filed in September and we are obviously interested in paying the legal minimum. We don't want to pay a dime more than what we are obligated to pay. We remain very focused on managing our effective rate. We took advantage of some credits in 2014 that were available to us that helps lower our effective rate as well as the state expansion where we continue to grow outside of Florida and pay more premium tax that's reducing our state income tax obligations and also helping our effective rate. But I would still guide everyone to a 37% to 38% effective rate at conservatism.

Samir Khare

Okay, perfect. And then, did you guys cover the cost of 11 reinsurances? The aggregates and I guess the Swiss Re.

Bennett Bradford Martz

Yeah, we haven't talked specifically about the cost. We intentionally rejected that section of the contracts we filed in our 8-K. Due to the confidential nature of our relationships with our reinsurers and the advisory of our broker. But, I can just tell you that from a seating ratio perspective it will have a de minimis impact on the seating ratio for 2016. We are talking one or two-tenths of a percent. So, there was an increase in cost relative to what we paid for that underlying catastrophe cover in 2015, but as it relates to our expectations for gross earned premium virtually no impact.

Samir Khare

All right, great. Thanks guys. Congratulations.

John Forney

Thank you, Samir.

Operator

Our next question comes from Edward Hemmelgarn with Shaker Investments.

Edward Hemmelgarn

Yeah, thanks. Good quarter. And I've got two questions. One is, what percentage do your new policy growth was in 2015 was due to acquisitions, I mean you have to get the one back in that first quarter?

Bennett Bradford Martz

Very small.

John Forney

Minimal.

Bennett Bradford Martz

Yeah, the Family Security Insurance Company, the company we acquired in February 2015 grows approximately $23 million of gross written premium during 2015. But our top-line growth was almost 133 million. So, you can do the math, 23 million of the 133 million.

Edward Hemmelgarn

It’s roughly 15% to 20%.

Bennett Bradford Martz

Correct.

Edward Hemmelgarn

Okay...

John Forney

Of that 109,000 new policy we wrote, it was zero of that. 109,000 new policies were new business that we grow to write, it’s not through acquisitions.

Bennett Bradford Martz

It's even less than that on an earned basis.

John Forney

Yeah, it’s much less than that.

Edward Hemmelgarn

Okay, thanks. And then the other thing is, when you think about your overall cat loss reinsurance, what obviously that there were no catastrophes you wouldn’t have any cat losses on the upper end as a percentage, what would do you view as your maximum kind of cat loss percentage that you can envision in a year. When you try to think about your exposure and obviously these are extremes, but?

John Forney

Yeah, I don’t know that is the way that we think about it, we manage our cat and non-cat risk to what we think our tolerance is that will enable us as we said to be able to earn 10% to 15% returns on equity that’s why we put this new program in place that’s why we set the retentions the way we do on our cat reinsurance program. So this year we had almost six points of cat losses, gross cat losses in the program and we’re still able to earn 12% returns. Our expected losses and for both cat and non-cat will lead us to believe that we’re going to be able to continue to do that. We had - $15 million on kitty cat losses, as Brad called them and 25 million on hurricane losses, if we had a full retention.

Bennett Bradford Martz

Yeah, the models will tell you on an expected loss basis if you include all parallel so winter storms, savior convicted storm and hurricane and earthquake as well. We should see a cat load over the long-term on an average annual loss basis of somewhere between 3% and 4%.

Edward Hemmelgarn

All right, I just was trying to get some idea of how you are thinking about. Okay, thanks.

Operator

Our next question comes from Casey Alexander with Ladenburg Thalmann.

Casey Alexander

Hi, good morning.

John Forney

Hi, Casey.

Casey Alexander

Brad, you gave a figure earlier and still it was 54%, 46% was that premium volume in Florida to non-Florida volume is that premium or was that policy, can you repeat that number for me?

Bennett Bradford Martz

Yes, sir, as policies in force, so of our policies in force at the end of 2015 we were at 54% Florida, 46% outside of Florida.

Casey Alexander

Okay, great. Thank you. John, do you sort of have an optimal mix in mind of where you'd like to get to between Florida and the non-Florida business as you approach your growth in the future?

John Forney

Our models have suggested that if this year we'll slipover to being by all different measures sort of 50-50 kind of company. We already have more than 50% of our exposure outside of Florida, but policies and premium are still a majority in Florida. That will flip over sometime this year 2017 perhaps at the latest, and I think by the time we get to $1 billion, which hopefully will be here in the next few years, it will be 60% or so outside of Florida 40% in maybe even a little bit more than that. If you look at the model of a company that did something similar to what we're doing not exactly the same strategy at all, but ASI which is recently purchased by Progressive, as they expanded into new states, when they got to a billion dollars they were 70:30 non-Florida and Florida that's not out of the question for us either. So, between 60% and 70%, by the time we get to a billion dollars, we'll be outside of Florida, I would expect at this point.

Casey Alexander

The Interboro acquisition which you hope to close this quarter comes with a book in place. How does that swing the existing mix, I mean you should have a feel for what that moves the needle to on a current basis?

John Forney

Yeah. Well, we have a $50 million to $60 million book of business in New York and South Carolina. So, you can do the math on that and see that will accelerate that growth outside of Florida.

Casey Alexander

Okay. Now, is that reasonable to relation, we assume sort of higher day-to-day underlying loss ratio as you move this mix as the non-Florida book as a premium to insured value this lower outside of Florida?

John Forney

You can expect higher gross loss ratio outside of Florida than in Florida we certainly do.

Casey Alexander

Yeah. Okay. And lastly just to clarify one other thing that you should there is been no pushback from the New York State Department of Insurance and trying to separate the auto from the property at Interboro?

John Forney

We did separate the auto from the property of Interboro is part of that transaction we do not write auto, we will not write auto so that was how the transaction was structured to separate those two books of businesses and we've got no push back on that.

Casey Alexander

Okay, great. Thank you for taking my questions. I appreciate it.

Operator

Thank you. We'd now like to turn the floor back over to management for closing remarks.

John Forney

Thank you very much, Andy. Thank you to all the investors who took their time this morning to be on the call. We appreciate your interest. We appreciate your questions. And we appreciate your ongoing support for UPC Insurance. Thanks so much for your time today.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.

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