Greetings, and welcome to United Insurance Holdings Corp., First Quarter 2019 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. I would now like to turn the conference over to Adam Prior of The Equity Group. Thank you. Please begin.

Thank you and good afternoon, 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. In addition, the company has made an accompanying presentation available as well. You’re 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 Web site. 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 relating to trends in the company’s operations and financial results and the business and the products of the company and its 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 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.

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, we appreciate your taking time to join us on the call. To reiterate what Adam said, for the second quarter in a row, we are publishing an investor presentation in conjunction with our earnings release. You can find it on our Web site and I encourage you to review it. While we will not be going slide by slide through that presentation, we may refer from time to time to some of the data and analytics included therein. There were a lot of positives to report this quarter. First, we continue to produce strong organic growth. Both personal lines and commercial lines grew at a double-digit rate during the quarter. In personal lines, we wrote over 37,000 new policies and average premiums were up about 4% year-over-year. This growth occurred across our geographic footprint, which you can see clearly on Page 4 of the investor presentation. Retention remained high. Our commercial book also grew strongly. We wrote about 9% more new business policies this year compared to last year’s Q1 and average premiums were up almost 8%. Second, we wrote our first policies in Journey. We formed our first AM Best-rated carrier last fall, Journey Insurance Company, got our initial product approved late in the year and started writing business in Q1. While we have started with commercial residential business in Florida, we also plan to write later this year in Texas and South Carolina in both personal and commercial lines. We received our certificates of authority for Journey in both those states during the quarter. Third, we had rate increases approved in two of our largest states, Florida and New York,…

Thank you, John, and hello. This is Brad Martz, the CFO of UPC Insurance. I’m pleased to review UPC’s financial results but also encourage everyone to review our press release, Form 10-Q and investor presentation for more information regarding the company’s performance. Highlights for the quarter ended March 31, 2019 include; gross premiums written of 319 million, an increase of 39 million or 14% year-over-year, net income of 9.5 million or $0.22 a share compared with 8.4 million or $0.20 a share last year, core income of 3.2 million, $0.07 a share versus 17 million or $0.40 a share a year ago, and underlying combined ratio of 94.1%, up 1.8 points from 92.4% in the first quarter last year, and book value per share of $12.52, up $0.42 a share or 3.5% since year-end. Premiums written for the quarter continued to indicate positive forward momentum in our business across all regions. Rate increases are working their way through our book in several key states, including Florida and New York, and overall retention rates are holding steady in the high 80s. Our premium mix consists of 63% personal lines, 37% commercial lines. Personal lines grew approximately 15% year-over-year, slightly faster than commercial lines at just under 13%. The Florida and Northeast regions accounted for approximately 84% of the growth in direct written premiums. Assumed commercial E&S premiums grew 51% to 28.8 million in Q1 and Journey Insurance Company, our newly formed AM Best-rated facility, wrote its first policy during the quarter. And we remain excited about Journey’s potential to access new distribution channels and market segments closed to carriers without at least an A-minus rating from AM Best. Ceded earned premiums were approximately 42% of gross earned premiums in the quarter compared to 41.7% last year. The company did incur about…

Thank you, Brad. I have no further remarks at this time, so we would like to open up the line to questions.

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

Good afternoon.

Good afternoon.

I have a couple of questions for you guys. First, I’d like to just talk for a second about the catastrophe experience you reported in the first quarter. One of your competitors has reported results and – FedNat and they came out with something closer to 19 million. And I know your market share statistics would reflect that there’s the risk that maybe your cat loss could go higher. So maybe you can spend a minute and just talk about what’s been going on in the first quarter with the Brevard County losses?

Hi, Greg. This is Brad. I can take that. Our gross catastrophe losses, as I mentioned, were over 27 million. I think the only point of comparability between us and FedNat would be the Florida, Brevard County hail event that occurred in the last week of March. And we reserved that initially at 15 million, which is basically right at the top of our retention. Anything in excess of 15 million is going to get 100% ceded up to 100 million. So the risk of adverse development related to that particular event is pretty small. Unlike the non-PCS event in the end of December that hit us because that was 80% retained.

And Greg, this is John Forney. The other cat events in Q1 reflect our larger geographic footprint I think than the company that you’re talking about. We’re spread out from Texas up to Maine and so we have seven other new cat events in Q1. They obviously were much smaller than that Brevard event, which was 15 million of the 27 million, so the other eight accounted for 12 million. And it’s interesting that our gross cat losses at this Q1 were lower than our gross cat losses last Q1, but we retained more. And it’s really just a function of how that cat ag reinsurance program works. But it’s good news for the rest of the year in terms of how that stuff could unwind depending on our experience.

Right. As a follow up to that comment, John, the second quarter has also been a problematic quarter in recent years for cat losses, non-hurricane cat type events, hailstorms and things like that. It would – your comments would seem to suggest because there are the ag programs in place that you’re going to – it’s going to diminish the effect of cat losses, hailstorms, things like that in the second quarter. Is that correct?

It could, absolutely, and I don’t want to jinx anything. The experience had been good so far in this Q2. We’re right in the middle of May, which is typically a very active month. But the experience has been good so far. But the cat ag program, if we do have cat activity, could definitely help us.

Yes. The two other areas I wanted to focus on; one, the underlying loss ratio that’s in your press release. And then I wanted to give you an opportunity to address the content on Page 9 in your investor deck. But let’s – on the underlying loss ratio whether it’s a gross basis or a net basis as a percentage of earned premium, there’s deterioration. And I know you highlighted in your comments some rate action that you have taken and more rate action that you intend to take. Should we assume that the 400 basis points of deterioration on a net basis is sort of the run rate for a couple of more quarters before that rate begins to flow through the earned premium?

No. Here’s what I would say about the deterioration. There’s a couple of things at work here. First of all, remember we had the correction on the reinsurance that Brad mentioned on the cat fund last year that’s a resubmission, which artificially inflated our ceding ratio. So when you’re talking about a net, it lowers the denominator and that’s going to push up the loss ratio even though that’s a completely nonrecurring thing and it was related to 2018. That’s one. Two, our commercial business had a low single-digit non-cat loss ratio last Q1. That’s not – and so the comparability from that is going – you’re not going to look better than that unless you have zero losses in the quarter. So it was well below historical levels. That was just an outlier quarter, which brings me to the last point. Remember, last year we produced our lowest personal lines non-cat loss ratio since 2014, even though we had an outlier quarter last year, Q3, where we had a bunch of large losses, we had a really bad non-cat loss quarter. But for the year, we had our lowest personal lines non-cat loss ratio since 2014; and in Florida, our lowest non-cat loss ratio since 2013. With all of the things that we’ve looked at from the elevated non-cat losses in Q1 from the personal lines book of business, it looked like it was just one of those quarters that we had a lot of large losses in the Northeast from fires and it doesn’t look like the underlying – and as I said, in April, that’s reversed and we looked good in April on non-cat losses. So we still think the underlying trends are positive, not negative, even though this quarter doesn’t show that.

Okay, great. Thank you for that answer. And then, John and Brad, can you just switch gears to Page 9 of your investor deck where you run through the different components of your core cat reinsurance renewal roadmap? Can you spend a minute and just provide some commentary on that slide? I’m curious about retention – per event retention. I’m curious about costs and it seems to be moving around a little bit. So just spend a couple of minutes and give us some additional color on that slide. That would be helpful. Thank you.

Sure. So the whole point of this slide is to compare our placement last year to this year and there’s a couple of points to make. Our gross limit needed is up slightly from 3.198 to 3.232. So we needed a little bit more limit. Even though our exposure has grown a lot more than that, our P&L has not which is good exposure management on our part. And so that’s why we didn’t need that much more limit, even though we buy more first event limit than anybody else that operates in Florida. The cat fund was a change from last year to this year, because they make you pick on March 1. If you don’t have great visibility on what reinsurance pricing is on March 1 and this year, there just wasn’t a lot of great visibility, you need to be defensive and take the cat fund which we did. So the cat fund bumped up to 90% from 45% and that is a $580 million change. We put more cat into our quota share program this year. That covers name storms, so that reduces our need even further. We did place a bunch of limit with partners on a private basis already. We have a cat fund that is in the market that’s launched that could be 200 million, it could be slightly more, it could be slightly less. That reduces our need. Retention, we’re keeping the same even though our exposure, it should actually go up if it’s going to be like-for-like, but we’re keeping it at the same level that it is now, so it’s really a more conservative retention. And the bottom line is, if you look at what’s been placed already, either with the cat fund or private partners or quota share, and what needs to get done at $3.2 billion, there’s less than $800 million left to go right now. And we haven’t even released firm order terms to the market. In other words, we haven’t even tried to formally place that $800 million with the rest of the market. And we had $1.6 billion of offers from the market last year. So we don’t even need everybody to renew their lines. We could have people cut in half and still get all the limit that we need. So the point is, we feel like we’re in really good shape on the core cat program. We placed most of it already. We’ll be releasing firm order terms sometime soon, don’t have an exact date for that, but we feel like it’s in really good shape.

And can you just comment on pricing expectations with that remaining 800 million that’s up for grabs?

We never commented on rates of increase or decrease on the reinsurance program, and we’re not going to change that now. We have really good reinsurance partners. We’re one of the 10 largest buyers of U.S. property cat reinsurance in the world. And so we have relationships with all the big reinsurers. And they’re really – they have been wonderful partners for us for a long time, on both the collateralized side and the balance sheet side. And we have long-term win-win relationships with them. So we’re going to come to a fair price with everybody that makes sense for them and makes sense for us. So far, we went into this with a pricing expectation overall for our program and right now, it looks like we’re going to be right on our pricing expectation for our program that we had going into it.

Okay. Thank you very much.

Thank you. [Operator Instructions]. Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed.

A question, I was just hoping to go back and get some additional color on the non-cat losses that you guys saw in the quarter. Is there any way to just give us number of losses, size of loss per event? And then also, just did these kind of the higher level of non-cat losses, was that specific to Florida or kind of widespread throughout your entire book of business?

Hi, Elyse. This is Brad. I need you to please clarify which you’re looking for, non-cat or cat. Because I think you mentioned per event, but that would imply cat. But I think you started asking for non-cat. So not sure which you’re looking for.

I mean like the non-cat losses. Because I remember last Q3, right, you said that there were a certain number of events, right, when it was a high non-cat loss quarter and your underlying loss ratio was also higher. So I was just going to get a sense of how many events and what really drove that underlying loss ratio up in the quarter?

Yes, we can’t comment on the number of events, but John did mention that we saw some unusual fire severity in the Northeast, so there were – there was some significant large loss activity. But number of events is not the right measure.

Okay. Can you just give us – would you attribute – if we look at the underlying loss ratio this Q1 or even this Q1 versus Q4, would you attribute all the delta really just to the higher non-cat losses? And then can you just give us a sense, John, I know you said that things look better in April to just give us a little bit of a greater sense of what you’re seeing subsequent to the first quarter?

What we’ve seen subsequent to the first quarter is what we expected going into the year. We have a plan, month-by-month plan, for what we expect in non-cat losses and cat losses and it’s very granular, by state, frequency and severity assumptions, based on historical trends in our book of business and actions that we’ve taken. And what we saw in April was what we expected to see. And so it seems like it’s reverted back more to where we are. We don’t – like I said, last year we ended up with a great non-cat loss ratio in personal lines even though we had one bad quarter. And that’s going to happen statistically. And so far in the second quarter, we don’t see it as a trend, but we’re on this stuff very closely.

And I can also confirm that John’s comments about the commercial being so much lower last year, we had a 4.9% non-cat gross loss ratio on commercial last year compared to 11.8% this year. 11.8% is still great, very close to our expectations. And the personal lines is pretty close to last year, only about 1 point difference. So no real concerns, just a little bit of comparability.

Okay, that’s helpful. Was there any change to your gross Irma loss in the quarter?

Yes. The gross Irma loss moved up to 965 million.

From 900 million.

Okay. Thank you. And then in terms of – I understand that you guys don’t want to I guess give a sense of pricing. In terms of your reinsurance program, you have about 800 million that you have left to renew. But could you just give us a sense, I guess you said that you haven’t been – there’s no – there’s no firm terms for the program just yet. How does this I guess renewal, maybe more just like qualitative, how does it feel relative to past renewal seasons?

It’s very interesting this year. It feels like people are moving much more cautiously on both sides, both the primary insurers and the reinsurers are just thinking a lot more about what they want to commit and at what price. And so it moves more – it seems like it’s just moved more slowly. But it’s moving. As I said for us, we’ve done some private deals and we’ve gotten a lot of our placement done. But the actual public firm order term offering hasn’t been done yet. But we sure are having a lot of conversations with reinsurers every single day and we’re pretty confident that we’re going to end up in something that makes sense for everybody.

Okay. Thank you.

Thank you. Our next question comes from the line of Samir Khare with Capital Returns Management. Please proceed.

Hi. Good afternoon. I was wondering if you can talk about the new contingent commission plan. How it came about, what metrics, rewards, type of business that it’s on?

We put that in place last year. We had had some one-off profit share plans with some large agents, and we decided we wanted to standardize it across our book of business. And it’s a very – it’s a combined ratio-oriented type of measure. It’s not a production measure. It’s not strictly a loss ratio measure. It’s a combination that we develop internally, our actuarial department did, on a very granular basis, agent by agent and we rolled it out last year and it’s been very successful.

Okay. And then I guess the increase in percentage that we saw year-over-year from policy acquisition cost from this commission plan, is this what we should kind of expect going forward year-over-year increase?

I don’t think you’re going to see – we didn’t have it in place last year, Samir. This is Brad. So it’s not – the change should be negligible year-over-year going forward. And the first period where we develop the accrual last year was the third quarter 2018, so we’ll have the same issue in the second quarter, because we’re establishing an accrual that didn’t, again, in comparing it against the prior period where there was no accrual. So you’ll see that again in the second quarter. But beyond that, no, there shouldn’t be much of a comparability issue. We’ve set a target for how much of the combined ratio improvement year-over-year we expect.

Okay, great.

And we’ll see how the year plays out.

But no, it’s not going to drive higher policy acquisition costs going forward.

Okay. And then the amount of ceded earned premium to the quota share this quarter?

Yes. Just one minute. I have to look it up.

Maybe while you do that, I’ll give John a question. The average premium in commercial was up 8%. I was wondering if you attribute that to something going on in the market, is it Lloyd’s retrenchment or something?

American Coastal is the preferred provider of commercial residential property insurance in the state of Florida, has been for a long time. And there has been sort of a war of attrition going on there with competitors forcing rate down a couple of years ago pretty aggressively and that went on for a while. But that sort of starts – stops being so much fun when your reinsurance costs get driven up and you can’t afford those rates. And it seems like that scenario was playing out a little bit where people want to do business with American Coastal and we don’t have to cut price to get that business.

Okay, great. And then – sorry, go ahead, Brad.

The ceded earned premium related to the quota share was 25.6 million for the quarter.

All right, perfect. And then maybe expanding on Elyse’s line of questioning on the cat expectations, with the aggregate stop loss in place, how much loss do you expect to retain in a given year?

I think that’s an estimate everyone has to develop independently. We’ve – you can see our historical experience. Obviously, we’re a growing company, but we’d hate to speculate on what we would expect.

What it could be, the retention is 5.75% of earned premium. So you can – if you have an estimate for earned premium for the year, you can multiply that by 5.75 and there’s your maximum that it could be.

Okay. And then I guess given the light current year cats in the first quarter, is there an expectation of how that might change going forward? Or I guess because it’s kind of a similar line of answering I guess.

Too soon to tell.

Okay. And then can you help us with policy acquisition expense ratio and other expense ratio guidance going forward?

It’s similar to what I’ve given in the past, 18% of gross earned premium.

Okay, great. Thanks a lot.

Thank you. [Operator Instructions]. Our next question comes from the line of Christopher Campbell with KBW. Please proceed.

Hi. Good afternoon.

Hi, Chris.

I guess my first question is on the loss rate stuff. What is the current IBNR? And then what are you guys paying out per month?

You’re talking about Irma?

Yes, for Irma. So you guys have like 965, how much of that is IBNR? And then what are you paying out in terms of claims monthly? Like what’s the monthly like, burn rate?

Yes, we’re not going to get into the monthly burn rate. I would tell you that the IBNR reserves embedded in our ultimate are 160 million. We’ve got about 3,200 open claims, so we feel like we’re in good shape.

Okay, got it. And then you guys are unique I guess this quarter in terms of like raising your gross loss pick. So I guess – and three of your other competitors or I guess four at this point have reported. So I guess just why would United be reporting gross losses and then the other companies wouldn’t be? Is there some incentive in terms of reinsurance renewals to not or to underreport gross losses?

Chris, I think you’ve got some bad information. There are multiple companies that have changed their gross loss pick. So --

Well, I’m thinking [indiscernible] hasn’t, Heritage didn’t today and then HCI, they all kept their prior loss picks or their gross loss picks for Irma.

I would comment that a major contributor to the increase was related to commercial lines and some of those other companies don’t write commercial. So commercial is developing more slowly. Obviously, it’s more complicated, higher severity loss, so that can be one explanation. But I would agree with John. I think overall, we’re just being intellectually honest. Our reinsurance partners appreciate that, and we can’t speak for the other companies.

Got it. And then one of your competitors, and I don’t want to focus too much on it, but one of them implied that the reinsurers use your estimates as their basis. Is that true or do they come up with their own ground-up estimate by loading your portfolio and then applying their models? I’m just trying to get – do they have an independent estimate or are they solely reliant on your estimates?

The reinsurers – it varies from reinsurer to reinsurer, but these are very sophisticated companies with very sophisticated modeling capabilities who can develop their own estimates and do so. They, like us, take a lot of different data points into consideration. But the suggestion that they just rely on companies’ estimate doesn’t ring true to me.

Okay, got it. That’s helpful. And then just as you’re thinking ahead to like the midyear renewals, there’s AOB reform and they’re increasing the reimbursements from the cat fund. I guess just how should – is there going to be a pricing benefit that would be baked into the open market limit that you’re renewing? Would you expect that to be kind of a good guy this year?

Because of the AOB reform?

Yes. Like would that start getting – so obviously the higher losses and the loss rate would get factored into reinsurers’ models, but are they also starting to factor in some of the reforms that are going to take place on July 1?

We’ll see. The reforms are brand new. They’re not even – unless something happened today, not even signed into law yet. And until that happens, no one is going to factor anything in.

Okay, got it. And then when you were – I think you guys had on – one of the accomplishments this quarter was using AI in re-underwriting. So what book are you re-underwriting? And how are you using that to, again, improve that line of business?

We have a couple of different initiatives in underwriting that I talked about some on last quarter’s call. One of them is the use of aerial, high-resolution, current aerial imagery to make sure that we have accurate information on roof condition and roof shape. The hip versus gable is a big deal in wind-exposed states, and the average homeowner doesn’t really know whether his or her roof is hip or gable and so they do the best they can. But it may or may not be accurate unless you actually have physically seen the roof and can make sure the information is correct, and it makes a big difference to premium. So we’re doing that, number one, to make sure we have the right amount and the early results of that are very promising in terms of additional premium that we’ll be getting without any additional exposure, that’s one. The second is we worked for two years to develop a predictive analytics model to try to answer the question which policies are going to have claims? Last year, 3.4% of our policyholders had a non-cat claim. Which 3.4% is it going to be? That’s a really interesting question. If you could answer that, you’d be a really good underwriter. We developed this model, and historically in personal lines, it’d be sort of a rule of thumb thing. Like if you had a prior loss, you are more likely to have a future loss and other rule of thumb sort of underwriting questions like that. What we did was much more rigorous than that. We – because we’re a 20-year-old company, we celebrated our 20th anniversary last night. We have lots of data on which policies actually had claims and which ones did not. So we developed a model and back-tested…

Got it. That makes a lot of sense. And then just a question about the cat bond. Now one of your peers also was saying that like the impression was that ILS pricing was kind of higher than traditional pricing this go around, I guess just – could you give us your thoughts and I know you guys use ILS. Is it more – I guess what’s the dynamic? What are you seeing in terms of pricing between traditional reinsurance and then ILS?

We’re not seeing differences in pricing based on whether you’re an ILS reinsurer or a balance sheet reinsurer. We’re seeing differences on pricing that are very idiosyncratic and specific to different reinsurers and what their experience has been the last couple of years, not necessarily just with Irma or Florida losses, but with California wildfires and typhoons and all of the other fun stuff that reinsurers have to deal with around the globe. Depending on that individual reinsurer’s experience with that, changes their desire for different rates. And it doesn’t seem to have anything to us to do with whether you’re ILS or balance sheet.

Got it. So is the experience that you’re not seeing as much – or I mean that some of these other events like California [indiscernible], those could be impacting renewal pricing this time versus just the Florida-specific experience of the cedents?

I don’t think it’s ever been just a Florida-specific experience to the cedents that affects pricing. So yes, the reinsurers have to look at their entire portfolio and what their loss experience has been, at least I would if I was a reinsurer, and try to figure out what the right price is for their product.

Okay. And then just one last one and then I’ll let you guys go is just on the buybacks. I guess what is your philosophy there? And then just in terms of like buying back shares and where are you guys at with excess capital now?

We, as you saw from the numbers, are still producing double-digit organic growth and this is a pretty capital-intensive business and supporting that growth requires capital. And we believe that there are really good returns to be had over time from that investment of that capital and the growth of our business. So we’ve not really been fans of buyback programs. I would never say never, but it’s not a priority for our use of capital.

Is there a level where it would, where the returns would make more sense?

I don’t want to get into a hypothetical. Like I said, you never say never, but it certainly would not be our first choice.

Okay, all right. Thanks for all the answers. Best of luck in the second quarter.

Thank you.

Thank you. We’d now like to turn it back to management for closing remarks.

Thank you again for taking time to join us on the call. As always, we appreciate your interest in UPC Insurance and we look forward to speaking to you all after Q2. Thank you.

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