United Insurance Holdings Corp.
Q3 2014 Earnings Call Transcript

Published: 1 Nov 2014

[Operator:]

Greetings and welcome to the UPC Insurance Third Quarter 2014 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). As a reminder this conference is being recorded. It is now my pleasure to turn the call over to your host Mr. Adam Prior of The Equity Group. Thank you Mr. Prior you may begin.

[Adam Prior:]

Thank you, operator, good morning everyone and thank you for joining us. You can find copies of UPC’s earnings release at www.upcinsurance.com, in the Investor Relations section. You’re also welcome to contact our office at 212-836-9606 and we’ll be happy to send you a copy. In addition UPC Insurance has made this broadcast available on its website as well. 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 may constitute forward-looking statements within the meaning of the Federal Securities Laws including statements relating to trends and the Company’s operations and financial results and the business and the products of the Company and subsidiaries. UPC’s actual results 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 new information, future developments or otherwise. With that, I would now like to turn the call over to Mr. John Forney, UPC’s Chief Executive officer; please go ahead John.

[John Forney:]

Thank you, Adam, and good morning to everyone participating in the call. Welcome to the Halloween Eve version of our quarterly conference call. This is John Forney, President and CEO of UPC Insurance and with me today is Brad Martz, Chief Financial Officer. I want to thank you for your interest in UPC insurance. And Brad and I look forward to answering any questions you may have the completion of our remarks. No box in the Halloween bag this year from UPC as our company delivered a strong quarter, marked by excellent results and continuing investment in people and infrastructure to support us as we move forward on our growth strategy to build a diversified book of property insurance in coastal states from Texas to Maine. More on that in a minute, but first I want to mention a couple specific items related to members of the UPC family. First a very sad note, this past month, we lost our longtime member of UPC family, Jennifer Hawkins. Jennifer was just 29 years old and she started at UPC 10 years ago, right out of high school. This was the only place she ever worked and the Company really was like her second family. Jennifer worked her way up at UPC from temp clerk to a manager in the claims department, and she was the significant contributor at our company. More importantly, she was a wonderful person who has raised a lot of -- so many people at our Company over the years. We will miss her. On a happier note, this quarter we welcomed our new Chief Underwriting Officer, Judy Copechal to the Company. Judy brought with her great technical skills in building successful books of business in several different lines at her former employer, the first tremendous leadership skills. But don’t take my word for it. Just last week Judy was honored by Insurance Networking News as one of the top ten women in insurance leadership for 2014. Deepak Menon and I flew to Chicago to be with Judy when she accepted the award and was called to see her up there with the other winners. All of them represented much larger companies. Judy is representative of the type of talent we have assembled at UPC insurance, a deep and experienced team was capable of competing and winning on a much larger stage and intends to do so. Now back to the quarter, a big differentiating factor for our company is that we are actively building a geographically diversified book of business in multiple markets with a long growth trajectory ahead. This quarter we were licensed in four new states Virginia, Delaware, Maryland and Mississippi, bringing the total number of states in which we are licensed to 15, but we are currently widening in only seven of those states, meaning that as we submit product filings and gain approvals in the coming months, we will be bringing the number of new states online therefore continuing to fuel top line growth even with our existing seven states, our book is growing and becoming increasingly diversified. This quarter to the first time ever, we wrote over 70% of our new policies outside the sales border and at the end of the quarter over 30% of our policies in force were outside the Sunshine State. We love this diversifying growth for a lot of reasons, not only because it helps product a healthy top line including a record $100 million of earned premium this quarter but because it provides a repeatable growth model not dependent on one-time events like Citizens takeouts that ultimately will run out. Financially, our results were strong up and down the income statement and balance sheet. Topline growth was robust. Our relative reinsurance spent decreased even as we bolstered the strength of our program. Our loss ratios stayed within acceptable balance while we maintained a conservative reserving philosophy and the expected were in check they started continuing investment in our future. Finally, I said this last quarter for the same message applies now. We’re pleased with these results but by no means are we satisfied. And that’s the best news of all, since we are confident that our feet performance is a head of us. At this point, I would like to turn the call over to Brad Martz for a more detailed discussion of our financial results. Brad?

[Brad Martz:]

Thank you, John. Good morning everyone. Before we get to the financial highlights, also like to encourage everyone to review our press release and Form 10-Q that we plan to file Tuesday, November 4. The highlights of UPC’s strong quarter include net income $8.6 million, a 109% increase from the same period a year ago, return on average equity of 27.4%, a 10 point improvement book value per share increased to $9.16 up 47% from September 30, 2013, our combined ratio improved 7.4 points down to 84.8 with the underlying combined ratio improving in a similar fashion continued favorable reserved development and total organic growth in direct written premiums despite not bringing any states online yet in 2014. Also, I’ll review Q3 with some insight on the revenues. Total revenues grew 33% from $51.8 million last year to $68.8 this quarter up to roughly $105.1 million of direct written for the quarter Florida was $71.3 million or roughly 68% of the total, outside of Florida it was $33.9 million remaining 32%. Overall direct written premiums increased nearly 26% year-over-year. Bisecting our growth by territory you will find Florida was $4.6 million or 21% of the year-over-year growth in direct written premiums. Whereas our business outside of Florida was the growth was nearly $17 million or 79% of the total year-over-year change. UPC’s business in the six states outside of Florida increased over a 100%, while Florida written premium growth was a modest 6.8% during the third quarter. UPC also has had a tremendous quarter in terms of extending our runway for future growth company recently announced to this now approved to write in 15 states and now has a very full pipeline of expansion activity as we continue to execute on our strategy. In addition to the solid organic topline growth, lower reinsurance cost also helped drive the year-over-year improvement in total revenue. While UPC exceeded significantly more premium dollars and risk this year compared to last. Our session business percentage of gross earned premium improved from 35.9% last year to 32.1% in the current quarter excluding federal flood premiums that are always 100% exceeded. [Indiscernible] I would like to cover UPC loss results, loss trends remains mostly favorable to both frequency and severity improving slightly during the third quarter compared to last year. Fourth quarter, our growth loss in LAE ratio improved to 29.9% first 31.9% last year, two point improvements. Our underlying gross on LAE ratio also improved a couple of points. Development on the per year loss reserves is favorable for the quarter and management remains comfortable for those carry liabilities across all [indiscernible] years. As touched upon on earnings release UPCs growth outside of Florida does make year-over-year comparison of our gross loss ratio and gross underlying loss ratio, a bit challenging. As Florida becomes the smaller part of our overall risk portfolio the companies grows non-GAAP loss ratio is increasing due to lower average premiums outside of Florida. On both side, reinsurance cost are little bit outside Florida. So we should be able to get to approximately the same combined ratio just from a slightly different direction. UPC’s, AOP loss ratio is outside of Florida continue to meet our expectations and are currently performing well within our level of pricing targets. Net reinsurance are loss in underlying loss ratio is also share improvement for the quarter and the year which is very evidenced on my previous comments about combined ratio. On the expense side, the company’s total non-loss operating expense increased approximately $5.7 million or 29% year-over-year. This percentage increase for the quarter was slightly higher than prior periods primarily because of the large contribution of written premium growth for outside of Florida where I mentioned previously where acquisition costs are higher as a percentage of premiums. UPC is also fully committed to transitioning away from escalated fee outsource service model which is significantly more extensive in performing most of these functions internally over the long-term. However, building out some of these capabilities internally has got in short-term pressure on expenses. Accordingly, UPC is growth expense ratio take up $0.07 for the point from prior year this quarter with a net expense ratio decline to one point three point due to lower reinsurance cost. For the year, our growth expense ratio remains in line with the prior year at 24.1%. Expense management is a priority for UPC and the current quarter is not reflected with the long-term potential to reach significant benefits of the improved size and scale our business model. Our balance sheet remains solid as UPC ended the quarter with a $191.6 million of shareholders equity, lower financial leverage and a net unrealized gain on the investment portfolio. Our liquidity remains strong with cash investment holdings increasing $111 million or a 34% or roughly $435 million at quarter end. I'd now like to reintroduce John Forney for some closing remarks.

[John Forney:]

Thank you, Brad. We appreciate your time today everybody. At this point, we would be happy to answer any questions you may have.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Arash Soleimani with KBW. Please proceed with your questions.

[Arash Soleimani:]

You obviously are getting license in more states, you are writing in seven licenses in '15. So how did you expand, obviously that implies some type of frequency in terms of countering weather losses, just wondering how you plan to kind of protect yourself against that as you continue to grow.

[John Forney:]

Clearly, the diversification into other markets geographically has great benefits for us in terms of our spread at risk, but as you correctly point out, also exposed us to more point in contact with catastrophic events. Today, we’ve had one retention in our reinsurance program covering all states, but we continue to evaluate options that have different levels of retention in different states and to buy specific towers protecting against perils in other states. It hasn't been necessary for us to do that yet because our -- we have not yet had the scale in other states to make it a significant enough threat, but certainly in future years, we will be putting in place specific reinsurance programs to make sure that we are protected against the kind of frequency that you mentioned.

[Arash Soleimani:]

Great. And then in terms of commercial evidence, can you talk a bit about why you find that attractive just an attractive line to be in?

[John Forney:]

Because it's right -- we don’t have concerns of our core competency which is that we know how to underwrite risk in cat-exposed areas. And it is complementary to our existing line of homeowner's business, we know how to evaluate the risk, we've hired some exceptional talents starting with Judy Copechal as well as [Carol Curry] and this week we had a full time commercial underwriter start, last week we had a full time commercial product manager starts, we are then doing product management for the commercial launch at Farmers Nationwide, some great experience there. So we've assembled a team with specific expertise, that's complementary to our existing business and we think it fits nicely in our portfolio.

[Arash Soleimani:]

Okay, great thanks. And in terms of wind-only policies in cities just curious what your thoughts are on those just given that there are no AOP losses, is that something that you guys would view as potentially attractive or is that something that you'd prefer to stay away from?

[John Forney:]

First of all, we don't stay away from wind-only on philosophical grounds. We evaluate every policy, as I said our core competency is we believe is underwriting property in cat-exposed areas. And if that's wind only or A or multi-peril, we are willing to take a look at it. So we certainly have taken a look at that. And as you know we have started initiatives to take some policies from the Texas Windstorm Insurance Association which is winds-only business. So we are not philosophically opposed to it.

[Arash Soleimani:]

Thanks. And final question. You said outside Florida the agent acquisition cost, agent commissions are higher, was that right?

[John Forney:]

Yes.

[Arash Soleimani:]

And is that just, is there any reason for that or is that just basically how it is?

[Brad Martz:]

I would start with the phrase, this is Brad Martz, is that in Florida they are unusually low. I think outside Florida, it's more of a standard commission but in Florida because of the affordability issues and risk to state basis, I think commissions are slightly lower than rest of them.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Samir Khare with Capital Returns Management. Please proceed with your question.

[Samir Khare:]

Brad you may have went over this really quickly, but did you guys mention your state surplus in the quarter?

[Brad Martz:]

I did not. That number is slightly over 95 million.

[Samir Khare:]

Okay.

[Brad Martz:]

We have yet to downstream many of the funds raised earlier this year due to the statutory insurance company. That is something we are considering doing.

[Samir Khare:]

Okay. And can you update us on the progress of TWIA. Will that be an initiative that plays out in '14, or is that something more recent of fortune '15?

[John Forney:]

I think it's more likely that it's something that plays out in 2015 and beyond, but TWIA is working to try to get in place, the appropriate infrastructure both from a system standpoint and from a legal standpoint to enable companies like ourselves and others to take policies out and we're in regular contact with them, are working with them to help them put those processes in place, but they've never done it before and if it takes a significant amount of time for entities like that to get all the proper checks and balances and processes in place to make it happen and they're working to do that and when they're ready, we'll be ready.

[Samir Khare:]

All right, perfect. And I know you guys have plans to take out some commercial residential from citizens, are there also efforts to do this on a voluntary basis?

[John Forney:]

We're running voluntary business. As I said, we've just assembled our team on the commercial side and we've started to write voluntary business. And as with our homeowners' business, voluntary will be the primary source of our growth that takeouts are just something we use to augment if it makes financial sense, but our model is not based on takeouts.

[Samir Khare:]

Okay, perfect. And then just some specific metrics for businesses coming in from Florida and outside Florida, I'm interested in the average premium per policy inside and outside Florida and a great, the gross AOP loss ratio that you're pressing for again outside and inside Florida?

[John Forney:]

Premium per policy at the end of the quarter in Florida was just over $1,900, outside Florida it was $1,400.

[Brad Martz:]

The AOP loss ratio is obviously very different state-by-state. So estimate going through every state, that information is disclosed and ready filings made in the states, we have to select targets but, it's generally going to be 5 points to 10 points higher than what we're targeting in Florida.

[Operator:]

Thank you. (Operator Instructions) Our next question is a follow-up question from the line of Samir Khare. Please proceed with your question.

[Samir Khare:]

A short queue today. Just a little bit more questions on rate changes, I imagine in Florida you guys are probably near flat slightly down, do you guys have the metric to the most recent rate filing that you guys have approved and or that's in the pipeline?

[John Forney:]

We have a filing that is being reviewed at currently by OAR and we'll that -- it is along the lines of what you suggested but they have not approved it, nor given us feedback as of yet. We expect to get that at some time in the near future.

[Samir Khare:]

Okay. And then just looking out of the state can you tell us what the homeowners' rate environment outside Florida? We seem to from some competitors outside Florida that it's actually more robust.

[Brad Martz:]

Yes, I think that's fair. We've taken rate in most of the states, South Carolina we've taken rate, Massachusetts we've taken rate, Rhode Island we've taken rate, we haven't taken yet in North Carolina, we've had the tweak rates -- are a little lower in New Jersey and Texas primarily because we started off in the market very conservatively and it is too high, but I think we've gotten the right levels that sort of are very -- that's healthy and competitive position in all the markets. We're not leaving any money on the table yet, we're not bowing to any kind of pressures regarding the new business outside the Florida it's not how we compete.

[Samir Khare:]

Okay. And results outside Florida seems to be really controlled and doing really well -- commend those efforts. On the other hand, you guys seem -- you look at to this before you guys seem to have a lot of drive pattern in the holding company and obviously I think of that capital base as a number you're growing through organically with an assumption from time-to-time or there are bigger initiatives guys are working on that will play out that will make use of that capital.

[John Forney:]

Samir, we said all along that there are several different means for us to grow the primary means is going to be organic growth through our independent agent distribution network. That's always going to be number one for us, we will augment that with external partnerships with other carriers such as a double relationship in New England and we're in active discussions to increase our partnerships with other carriers outside the state of Florida. We also, as you know, from time-to-time do takeouts from services and potentially from other residual market entities to augment our growth and as you know we have some in the pipeline in Florida as well as the fastest initiative right now. And finally, we are open for the possibility of doing acquisitions of other companies or books of business. We are continually evaluating opportunities that we are committed to remained disciplined in our financial and strategic approach to those opportunities.

[Samir Khare:]

Great and one more to me there was a pretty negative report from [indiscernible] ratings on the Florida homeowners industry in general. A pretty much grouping all the companies together and given the failure of the few companies in years with no cash, some people might think that’s the fair conclusion, can you tell us how industry insiders whether it will be Demotech or reinsurers differentiate between the companies in Florida and thus being multistate to you; any advantage in regard?

[John Forney:]

I don’t comment on other companies business plans obviously we like our business plan. We think it gives us a more robust, more diversified; more enduring opportunity to build the company that will be here for generations to come than a single state model does. That’s why we’re doing it and we believe there is a market opportunity and certainly that be through our expansion into other states, and so the response and reception we got in other states is nothing except ratify that features that we have at our company. In terms of differentiations between the companies, I think Demotech does a good job in making sure that folks have adequate capital and reinsurance to support their lighting space to significantly enhance their requirements this year so that you had to have enough reinsurance to cover both 1 in a 100 year event and 1 in 50 year event in the same year, it’s 1 in 5000, if you’re doing math that’s a very unlikely sequence of events of yet. Folks that are getting Demotech rating need to be able to demonstrate that they can cover all that. So that’s a pretty high bar to set, and so I think the company that can demonstrate that they can meet that are in pretty good shape financially. I do think that agents are increasingly differentiating between companies and want to place business with quality companies not necessarily with the latest labor and as long as latest labor is out there in Florida and lots of folks are being aggressive [Audio Gap] get business and I think for the most part agents do a very good in differentiating that. But I think the market is generally a lot healthier than some of the [Audio Gap] would suggest in Florida.

[Operator:]

Thank you. Our next question is another follow-up question from the line of Arash Soleimani. Please proceed with your question.

[Arash Soleimani:]

Did you dispose discount inside and outside Florida as of the end of 3Q?

[Brad Martz:]

I don’t if we did, but I can tell you what it is

[Arash Soleimani:]

Please.

[Brad Martz:]

So insides and outside Florida just, there were 156,000, discounts outside of Florida just over 67,000.

[Arash Soleimani:]

Another question, you’d mentioned some product filings outside Florida that sort of employ more granular pricing technique. And just one question I have there to what extent is that something that you see other perhaps larger national [indiscernible] sort of replicating given if they had the resources also to invest in that sort of technology and how do you see that impacting your growth as you try to go more in land those states?

[Brad Martz:]

We have a lot of respect for the big national company certainly they have a lot of resources. I am not sure that adopting the type of granular approach that we have adopted to cap pricing is something that they do a lot of or that will necessarily change their general philosophy on concentration in cat-exposed areas. We don’t want to have concentration in cat-exposed areas and even neither do they. I’ve said this before straight forward in all state and 30% of the market for homeowner nations wide, they don’t want 30% in cat-exposed area they’re going to have a smaller percentage just because the nature of cap risk is different than the nature of risk in the interior of the country where caps are not an issue, and scale and concentrations are your friend. So those markets need more companies while in smaller amount of risk that need that we’re selling by what we’re doing. We are just trying to be smart about how we’re doing it, and so we do price cap risk in a very granular way that differentiates between different parts of the zip code or different parts of the rain territory because the cost of reinsurance and the potential damage from storms are different in different parts of the rainy territory or a zip code and our pricing try to take that in to account and it makes us more competitive in some areas, not competitive in others, but gives us what we think is the right way for the right risk in those areas.

[Arash Soleimani:]

Thanks. And finally it’s not enough sure as any thoughts on the governance rates and as Charlie Crist would come out how you think that would impact? Did you see that being significant adversity it happens? Or do you think it’s something that part of bigger deal people make it seem?

[John Forney:]

I think our company and others do a great service for the state of Florida and for consumers. Our company in other word keeps the promise we try to be there for people at their greatest time in need to pay their claims and we’re committed to doing that no matter who you got there and we look forward to working with whoever wins the election to make sure that company’s like ours can continue to be there becomes a promise for policy holders in Florida.

[Operator:]

(Operator Instructions) There appear to be no further questions at this time I’d like to turn the floor back over to management for closing comment.

[John Forney:]

Once again we thank everybody for taking time in this early Thursday morning to participate and listen to the call. We appreciate your interest in UPC insurance very much. Have a good day.

[Operator:]

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