United Insurance Holdings' (UIHC) CEO John Forney on Q2 2016 Results - Earnings Call Transcript

| About: United Insurance (UIHC)

United Insurance Holdings Corp. (NASDAQ:UIHC)

Q2 2016 Earnings Conference Call

August 03, 2016 9:00 AM ET

Executives

Adam Prior – IR, The Equity Group

John Forney - President & CEO

Brad Martz - CFO

Analysts

Elyse Greenspan - Wells Fargo

Greg Peters - Raymond James

Brenden Stoner - Stoner Equities, LLC

Operator

Greetings and welcome to the UPC Insurance Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce to your host, Adam Prior of the Equity Group, please go ahead.

Adam Prior

Thank you and good morning everyone. Thank you for joining us.

You can find final copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. You are also welcome to contact our office at 212-836-9606 and we'd be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website.

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 in this conference call may 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 and the products of the Company and subsidiaries.

Actual results from UPC 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. 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. We know there is a lot going on in your world right now, so we really appreciate your taking time to join us on the call.

This is a very active quarter for UPC Insurance and one in which we made significant progress towards our goal of becoming the premier provider of property insurance in catastrophe-exposed areas. Here are a few highlights. We closed on our purchase of Interboro Insurance Company which brought us a group of talented associates and a foothold in New York which will be an important stake for us. Interboro was profitable in both of its first two months of operation as part of the UPC family.

Organic growth was strong again, the three months of the second quarter was the first, second and third biggest new production months in our company’s history. We wrote over 12,000 new policies every month in the quarter, 85% of them outside Florida and we ended June with over 400,000 policies in force.

Our book is large, we ended the quarter with almost $200 billion of total insured value double what it was just two years ago, and our book is also diversified with business in 12 states and over half of our business outside of Florida no matter how you measure it. I’m grateful to the over 7,000 independent agents who entrust our customers to us daily and to our amazing sales team led by Deepak Menon.

We’re earning this business not buying it. We ended the quarter with the highest average premium per policy in our non-Florida business in our company’s history. In the past year we’ve taken rate increases in Massachusetts, Rhode Island, North Carolina and Florida and are evaluating others. Agents know that our value proposition includes fair pricings but that we will always put financial stability and rate adequacy first.

Our reinsurance structure plays a big role in providing us financial stability and this quarter we placed our hurricane reinsurance program which provides us the greatest amount of protection on both an absolute and a relative basis in the company’s history, $1.5 billion in coverage to be precise and very robust and flexible coverage. Thanks to the unique structure our partners and TigerrRisk have helped us to develop and thanks to the commitment of our reinsurance partners who have grown with us.

This year we also placed part of our reinsurance program in the capital markets which brought us almost 20 new investors and positioned us to continue to grow our program in future years. Our non-hurricane reinsurance program also helped to deflect most of the impact of the very active weather quarter we just experienced and some variation of that strategy will be an integral part of how we operate going forward.

Financially we also continued to build strength in the quarter. We ended the quarter with almost $1 billion in assets and over $250 million in stockholders’ equity. We had to fight hard this quarter to the solid bottom-line results we produced, given the very high frequency of weather related losses and that spirit of determination of our company is what I’m most pleased about today.

I'll stop at this point and turn it over to Brad Martz to talk in more detail about our financial results and look forward to answering questions once Brad has completed his remarks. Brad?

Brad Martz

Thank you, John. And hello. I'm Brad Martz, CFO of UPC Insurance and pleased to review the financial highlights. But before we get to those, I would like to remind an encourage everyone to review our press release from August 2nd and form 10-Q that we plan to file on August 9th. Highlights of the UPC second quarter 2016 include gross premiums written of 211 million, 30% growth year-over-year. Gross premiums earned of a 165 million, 36% growth year-over-year. Net income of 9.8 million or EPS of $0.45 per share up 87% year-over-year. And underlying combined ratio of 88.8% which was down roughly 60 basis points from the same quarter a year ago.

Book value per share increased to $11.97 per share up 18%. Return on average equity of 14.5% and last but not least we consolidated the accretive results Interboro Insurance Company which we acquired during the second quarter.

UPC saw a continued premium growth during the quarter, with total revenue growing 42% from 85.3 million last year to just under 120 million in the current quarter. Direct premiums written for the second quarter 2016 were derived 52% from Florida, 21% from the Gulf region, 12% from the South East and 15% from the North East. Great balance.

Florida grew a modest 7% on a direct basis, and non-Florida represented 85% of the year-over-year growth in direct written premium. Interboro Insurance Company contributed approximately 10 million of direct written premium for the months of May and June, which was about 21% of the year-over-year increase. And our total policies in force at June 30th grew to over 414,000 up approximately 45% year-over-year with a policy mix of about 45% in Florida and 55% outside of Florida.

UPC’s losses increased approximately 40% from 44.6 million last year to 62.6 million in the current quarter. However, our net loss ratio actually declined 70 basis points, from 55.5% last year to 54.8% this year. The company did have approximately 3.7 million of net retained catastrophe losses and $0.5 million of adverse reserve development on prior accident years during the quarter which added roughly 3.7 points to the net loss ratio. Excluding the impacts of net retained catastrophe losses and prior year reserve development UPC’s gross and net underlying loss ratios increased year-over-year due primarily to unusually high frequency of weather related losses outside of Florida during the second quarter.

During the quarter the company also saw its non-loss operating expenses increase approximately $10.5 million or 32% year-over-year. $4.5 million or 43% of that change was driven by policy acquisition costs with the remaining $6 million or 57% driven by all other operating expenses. More importantly UPC saw improvement in its operating efficiency as reflected in our expense ratios during the current quarter. The gross expense ratio decreased approximately 80 basis points from 26.9% last year to 26.1% in the current quarter and the net expense ratio declined 2.7 points from 40.4 last year to 37.7 this year. The primary drivers of the expense ratio improvements are attributable to lower policy acquisition cost primarily agent commissions which were partially offset by higher amortization expenses which includes software investments in tangible assets related to the Interboro acquisition.

The benefit of additional scale, cost containment initiatives and lower policy processing costs all played a part in our operating efficiency improvements which are expected to continue over the next several quarters. Our balance sheet remains very healthy as UPC ended the quarter with total assets just under $1 billion and shareholders’ equity of approximately $259 million. Our liquidity remains strong with cash and investment holdings of over $0.5 million and our statutory surplus of the combined group including Interboro was just under $190 million for the quarter.

With that I would like to now reintroduce John Forney for some closing remarks.

John Forney

Thank you Brad. Why don't we open it up for questions at this point and I will have a couple of remarks afterward on taking all the questions. So we are ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Please proceed.

Elyse Greenspan

Hi, good morning. First on the cat losses in the quarter, is there any way to breakdown in the release it says from tropical storm Colin and other events and then also you did, I think I heard that you said that there were losses covered under your reinsurance program in the quarter. So what were the gross catastrophe losses? Can you provide that number as well?

Brad Martz

Good morning Elyse, this is Brad Martz. The gross losses for the quarter were approximately $34 million, so we had roughly 19 or year-to-date we’re approximately $34 million excuse me, so for the quarter we were close to $19 million, we retained 3.7 so ceded was approximately $15 million.

So the catastrophe aggregate obviously is playing an integral role in managing some of the volatility. We feel, so we utilized a significant chunk of that limit but we do feel good about our outlook for the balance of the year. The remaining expected loss, the exposure we feel like we have got plenty of limit left and these estimates and these numbers I am providing to you include some very conservative IBNR reserve assumptions. So depending on how you want to estimate the ultimate - with smaller cat events like that it can be very difficult to estimate that but we feel like this is conservative and we’ve got sufficient limit left for the remainder of the year, but we are evaluating it carefully and I hope that answers your question.

Elyse Greenspan

Yes. But then, in terms of the 3.7 million of retained cat losses in the quarter how much of that came from tropical storm Colin versus smaller other events?

Brad Martz

Roughly half of it was tropical storm Colin. The other half was smaller events that didn't need our franchise to [indiscernible].

Elyse Greenspan

Okay, great. And then, how much premiums did Interboro add in the quarter to the top-line?

Brad Martz

10 million.

Elyse Greenspan

10 million, okay.

Brad Martz

But that was just for May and June. We didn't have Interboro for the month of April.

Elyse Greenspan

Okay and would that be kind of a run rate, I guess, if you assume if it had been for full quarter 15 million kind of how you see that coming online on a quarterly basis?

Brad Martz

Potentially, we obviously - it's a 15 million book of business in force today, we want to grow it, but there was a little bit of assumed premium in the quarter as it relates to book of business we assume from Maidstone Insurance Company former affiliated to Interboro. So yes, I think it's a fair run rate for the balance of the year.

Elyse Greenspan

Okay. And then the prior year adverse development in the quarter, can you just provide more details I know is modest just where that came from and then I know in the past you guys have said that you haven’t been impacted by the assignment of benefit like other Florida insurers, just I just want to reemphasize is that still the case and just comment on the prior year development.

John Forney

Sure, Elyse, this is John Forney. As you know that the prior year development that we had was very modest. It was mostly attributable to Florida but it was a small amount that really is relatively immaterial. With regard to AOB, I would say that first of all AOB impacts everybody in Florida if you're writing business in Florida, you're going to have some impact from it. And we are definitely being impacted by AOB. But the impact on us is far less than it is on other carriers as is becoming obvious for the following reasons. 1) We have a relatively low concentration of business in the AOB hotspots, which are Dade and Broward County. We have very little business down there, we don’t do a lot of takeout business. We don’t write voluntary business at all in Dade County and so our book of business down there is smaller. That helps shield us from the worst of the AOB phenomenon.

The second thing is we have a very holistic approach to how we deal with AOB in Florida. That starts with underwriting and product and forms and continued on to claims and to legal. And we have things that we do at each step of that process that is designed to mitigate our AOB issues and it's worked fairly successfully. Again, we're not immune to it but our holistic approach works.

And third, I'll say that our general counsel Kim Salmon who before she joined us was a defense litigator, insurance defense litigator in Florida for a number of years, is the industry thought leader on how to battle AOB. And she has been integral in helping us to make sure we’re positioned, so that we don’t get the worst of that. And for all those reasons, and one more I guess I'll say obviously is we're diversified outside of Florida so significantly now with well over half our business coming outside of Florida, all those things make AOB an irritant to us but not a material factor in our results.

Brad Martz

And I guess I’ll just add, the development was again minor, 0.5 million. We’ve just been reluctant to release IBNR reserves on the most recent accident year which is 2015. So, the development is really on the most recent accident year, all prior years are fine, nothing to be concerned of.

Elyse Greenspan

Okay, great. And then you've said there was a higher weather related frequency in the quarter. Is there any way to kind of at least give us some numbers on how much that added to the underlying loss ratio?

Brad Martz

Yes. I mean, almost the entire variance, I think from a non-weather frequency perspective we did well. Total frequency for the quarter was about 6.4%. Non-weather was 3.1%, the balance was cat and weather related. And if we look at historical trends, the non-weather frequency for the quarter was below historical trends and the cat and weather related cause of losses were well above historical trends. So, we feel good about that. We obviously don’t control frequency but we've responded adequately and I think we've done a good job of managing it and providing delivering on the promise to our agents and policy holders.

Elyse Greenspan

Okay. And then last question if I may. The Florida growth, I know more outside of Florida, but the Florida growth did pick up a little bit in the quarter. Can you just comment kind of on where the growth is stemming from and you know of if that looks like a level you might expect to continue during the balance of this year.

John Forney

This is John Forney again, Elyse. The growth in Florida is entirely attributable to renewed energy in our sales efforts. We have some new folks that we brought in both inside sales people and outside sales people that are new to the company that are doing a terrific job. Our product hasn’t changed, rates are more or less the same. We're just getting after it more out there with our sales team and they're doing a fantastic job. That's where the growth is coming from.

Brad Martz

It's fairly balanced throughout the state.

Elyse Greenspan

Okay. Thank you, very much.

Operator

Thank you. Our next question comes from Greg Peters with Raymond James. Please proceed.

Greg Peters

Good morning and congratulations on the quarter.

John Forney

Thank you, Greg.

Greg Peters

Just a couple of follow-ups. Can we circle back to the aggregate reinsurance program, I'm sorry if I missed it. How much did you say is left in terms of protection?

Brad Martz

I didn’t say it. I said we had adequate limit for meeting based on our feel of expected losses for the balance of 2016. That's kind of how we feel. But based on the numbers we recorded, we've have about 25% of the aggregate limit remaining. We've technically used about 75% limit. But that's inclusive of some very conservative ultimate loss projections.

Greg Peters

Right.

Brad Martz

So, depending -- so, we feel good about the limit remaining given the fact that the majority and [preponderance] [ph] of the exposure to that treaty is in the first half of the year.

Greg Peters

So, I guess, is the natural questions and I sensed it from your answers. The natural question would be as you think about the business for the balance of the year, especially with the large footprint, large and growing footprint outside of Florida, what your thought process is to buying some additional cover before the end of the year. And then given the success of the program to your benefit this year, I'm sure you're having substantive conversations with your reinsurance partners and I'm curious about your perspective pricing of this program as you think about next year.

John Forney

Hey, Greg. This is John Forney. I'll take that. We're evaluating where we are with regard to non-hurricane cat loss - expected losses the rest of the year. And as Brad said based on what we - our evaluation so far, we believe that the limit we have left is adequate in that probably purchasing more at this point would not be economically smart on our part. But we'll continue to evaluate it. But if you look at the pattern of losses and the expected loss on our book of business, we think we're in good shape right now but it's something that's an ongoing evaluation for us.

We have no idea about pricing for renewals on this treaty as I said. We changed our treaty a little bit each of the last two years. We may not have the exact same kind of treaty next year for non-hurricane losses. And we'll start to work on renewal discussions later on in Q3 for that. But we don’t have any visibility on that right now.

Greg Peters

Okay, fair enough. And then just from a big picture perspective, you're making substantial progress on your target of getting to a billion dollars of premium, and doing it all a lot of it outside of the state, which is to be applauded. But when I think back to your capital base, I'm just curious about your perspective on where you are from a capital adequacy perspective and how you're thinking about that in terms of the substantive growth that you continue to generate.

John Forney

Well, we are generating significant capital through our profitable growth. That's number one. We evaluate capital adequacy continuously and we'll address it again this quarter with our board and we are considering lots of different option for adding capital should we need it sometime later this year. But we don’t have any definite planned in that regard. But we're sensitive to that and we're very appreciate of the growth and the fact that the growth for the most part has been so profitable helps to fray the need for additional external capital. But you're right, at some point we will need additional external capital and we've looked at lots of different options for how to do that. We have no definite plans at this point as to when that will occur or what form it would take.

Greg Peters

Do you have any sort of benchmarks to it, when you're talking to the rating agencies or the regulatory authorities that you are sort of mindful of as you continue to grow?

Brad Martz

Sure. I mean, their rating ratio targets and risk based capital targets that we have set forward in terms of measuring and benchmarking our capital adequacy, but those are fairly fluid and flexible to be honest because they can't be managed very aggressively through just reinsurance alone. Obviously, we buy a lot of reinsurance that would be the go to sort of way to attack over those items and reduce the required capital on a statutory basis. But if we don't want to do that we want to look at more permanent forms of capital we will do that and it will probably be a mixture of debt equity and reinsurance going forward not know one solution.

Greg Peters

Okay. Well thanks very much for the answers and good luck in the next quarter.

John Forney

Thank you, Greg.

Operator

[Operator Instructions] Our next question comes from Brenden Stoner with Stoner Equities, LLC. Please proceed.

Brenden Stoner

Hi gentlemen. Congratulations on the quarter and keep it up. I just have a couple of questions for you regarding your sales growth. I know someone touched on it a bit earlier. Since sales for how you see the rest of the year playing out with the sales growth potentially carry through for the rest of the year and specifically in Florida?

John Forney

We see no reason to think that sales pace that we have established during the first six months of the year won't continue into the second six months of the year. We have strong momentum in all of our states company is very well regarded by the agent community. We have a great sales team. We have good products. We have competitive pricing and we should continue to be able to put business on the book of the pace that we are doing.

Brenden Stoner

Excellent. And then can you I don't know if you have these available but do you have the retention or renewal numbers pro forma for Florida?

John Forney

Did you say for Florida?

Brenden Stoner

Yes for Florida.

John Forney

Yes, hold on a second Brad got that.

Brad Martz

Yes. So year-to-date the retention rate for Florida is 93.5% at renewal and 87.2% through the full.

Brenden Stoner

Excellent, wonderful. Okay and then do you also have your cash flow operation numbers for the six months?

Brad Martz

We don't have that in front of me. What that information will be provided in our 10Q.

Brenden Stoner

Okay. Not a problem. Alright well, thanks for answering the question and again congrats on the quarter, so you continue the excellent growth.

John Forney

Thank you.

Operator

Our next question comes from [Anthony Tu][Ph] with KBW. Please proceed.

Unidentified Analyst

Hi good morning. Thank you for taking my questions. What drove acquisition ratio lower this quarter? Was there any kind of onetime events effect as the numbers?

John Forney

No a lot of it is managing our acquisition cost more aggressively. Obviously we are making some headway on improving operating efficiency of the company and that tails fine tuning of commission programs, it involves migrating business off of legacy platforms which is a variable cost included in policy acquisition cost to our new brand, new platforms which is a fixed cost basically embedded in G&A through sophomore amortization. So it's those - those are the two primary drivers.

Unidentified Analyst

Great, thanks that was helpful and sorry if I may have missed this earlier but can you talk a little bit about how the cat losses during the quarter. We had assumed your aggregate cover reserve most of everything and given that you hit your retention in the first quarter?

John Forney

Yes, I don't think we have much to add. There are 14 separate events that we evaluated for as cat or that at least met our franchise to deductible so it's very active lot of frequency but I don't think we have anything to add.

Unidentified Analyst

Okay and lastly have you adapted citizens on new policy language relating to the assignment of benefits and if not do you plan to do some in the near term?

Brad Martz

We have adapted. It's been approved effective for new business September 1 and for renewal on October 1.

Unidentified Analyst

Great, thanks. I will get back into the queue.

John Forney

Thank you.

Operator

Thank you. We now like to turn the call back over to management for closing remarks.

John Forney

Thank you. Olympics starts this weekend in Rio but there won't be a better story coming out of the Olympics than the one about the US athlete who is not going. I wanted to tell it to you briefly because it illustrates some things that I think you should know about UPC Insurance. At last month’s US track and field Olympics trials, Kendra Harrison was the favorite in the 100 meters women high hurdles. But she had a bad race and she finished in 6th place. So she is not going to the Olympics. After the race she didn't make any excuses. She just got back to work and two weeks later in a race against all the women who are going to the Olympics she not only won the race but she broke a world record that had stood for 28 years.

Kendra Harrison’s performance and her actions epitomize the qualities that we talk about all the time at UPC Insurance, accountability, resilience, persistence. I see those character traits every single day in our people and so for our investors you should know our company will always show up every single day. We are going to have our good days and our bad days but when we have bad days we are going to get back up and we are going to persist. We are willing to hold ourselves accountable and we will hold ourselves accountable to you for producing great value over a long period of time. That's how you build something great and that's the kind of company that we are building at UPC Insurance. We really appreciate everybody's time today and your support for our company. Thanks everybody.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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