Greetings. Welcome to the United Insurance Holdings Corporation's Second Quarter 2021 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Adam Prior of The Equity Group. Thank you. You may begin.

Thank you, Alex, 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 on its website. We also welcome to contact our office at (212) 836-9606, and I'd 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'd 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. Dan Peed, UPC's Chief Executive Officer. Please go ahead, Dan.

Thanks, Adam. Hello, and thanks for joining us on our Second Quarter Earnings Call. I'm Dan Peed, Chairman and CEO of UPC. I'm planning to offer an overview and discussion of some of our activities and then turn it over to Brad Martz and he'll go over specific numbers. The second quarter results reflect continued execution of our 2021 transition plan. The plan is to rotate to a dramatically reduced named and non-named CAT retention level and increased quota share of protection, both of these to de-stress capital and reduce volatility. These actions drive a significantly increased reinsurance spend, which reduces our margin during the transition, but are subsequently priced into the portfolio, meaning that we capture the increased price of our reinsurance and our policy premiums. We continue to stay focused on the steps necessary to achieve a strong underwriting profit, beginning in 2022 and continuing to grow in 2023, along with reduced volatility at the same time from both our commercial and personal lines businesses. These steps include compounding rate increases, adequate reserving, exposure management and enhanced risk selection. Many of the underwriting actions that we began to take in the second half of 2020 are beginning to flow through as written and subsequently earned premium. In the second quarter, our personal lines average rate was, again, up by 10.4% and commercial lines average rate was up by nearly 18%. Our personal lines renewal business premium increased over the last 12 months on like-for-like accounts by $89.9 million with a record $27 million increase in the second quarter. Our current filings across all states will yield an average renewal business rate increase in the third quarter of nearly 20% and near 15% in the fourth quarter. Note that these rate increases are compounding on top of at least…

Thank you, Dan. And hello, this is Brad Martz, President UPC -- CFO of UPC Insurance. I'm pleased to review UPC's financial results, but encourage everyone to review our press release, investor presentation and Form 10-Q for more information regarding the company's performance. While we're disappointed with our results so far this transition year in some respects, Page 4 of our investor presentation summarizes good progress we've made delivering on several important strategic initiatives to reduce volatility and improve results. Our response to these challenges in our business is creating a foundation for profitable growth in future periods. Evidence of this progress includes, but is not limited to, improvements in our reinsurance program that has significantly reduced our Group's net exposure to hurricane risk, underwriting actions to ensure rate adequacy and proper insurance to value that are expected to fuel significant increases in net premiums, reorganization of insurance operations to better connect information technology, underwriting, actuarial and analytics and our CAT modeling teams under the common leadership of our CIO, Chris Griffith, to ensure data and technology are at the heart of our risk selection and exposure management processes going forward. And finally, we're proud of formalizing our ESG strategy and making certain commitments that we expect to improve decision-making, associate engagement and our results over time. For more information on our ESG strategy, you can refer to Page 15 of our investor presentation, and view our full report is available on our website. For the quarter ending June 30, 2021, the company reported a GAAP net loss of $23.5 million or $0.55 a share. On Page 5 of our investor presentation reconciles our core loss of $24.6 million or $0.57 a share to our underlying core earnings that exclude CAT and prior year development, which declined roughly $6 million…

[Operator Instructions] Our first question comes from Greg Peters with Raymond James.

I guess to start things off with on your exposure management strategy. I think you said, Dan, in your comments that you're targeting, by the end of September, to have it down 13% or 14%. And I'm wondering if there's other levers you can pull to drive it lower, further quicker, if that makes sense to you?

Yes. Thanks, Greg. So the September 30 is when the -- like the Florida hurricane catastrophe fund and other things set. So that's how we kind of measure the exposure for this year, and that's why it's been our target. We did target 13%. I don't have the numbers right at hand, but I believe we're ahead of pace on that target. That, of course, is our exposure management of our main personal lines and commercial lines. But we have done other things such as the sale to HCI of the 4 Northeast states that obviously will reduce our exposure in an expedited manner. And then the other side of that equation, as we've discussed, is the increase or kind of dramatic increase in our reinsurance and moving our retentions down like we said from what was last year about, I think, $208 million to this year, having an aggregate recruit companies of $31 million. And I remember our target on the first quarter call was $25 million versus second event and $70 million aggregate. So we actually improved upon on that number. But those things all are mitigating our exposure.

Right. And then when I look at your press release, I think on Page 3, you talk about -- you disclosed the premium by state. And with what is such a challenging environment in Florida, it's the only state where you're showing positive change, yet I'm pretty sure you're dropping your TIV. So that's got to be -- the variance is just all rate, is that the right read on that?

That's right. And the key thing happening there, if I remember what you're looking at is that the commercial and personal are together, and we're -- what we're growing, most dramatically from a rate perspective, is our American Coastal book, which is 100% in Florida. And so that moves those totals that you're seeing there.

Yes. I guess just 2 more questions. First, I know -- I think I know what the answer is, but I'm just going to have you talk to it. And this is the next page of your press release, Page 4, and this is the table where you go through the underlying loss and LAE ratios. And with all the rate that you've thrown at the book, I was surprised to see such a dramatic deterioration in that ratio on a year-over-year basis. And I'm talking about the -- going from 39.2% last year. And obviously, that was probably -- COVID had a favorable influence on that number, but going to 53.7%, it seemed like it was running a little bit higher than what I would have ordinarily expected.

Yes. And I can comment on that. And we'll say that it's higher than we expected. Obviously, we watch that underlying ratio as an important indicator as to how the book is doing, excluding CATs and prior year development. In this quarter, specifically, and then this half to, some degree, both the the non-CAT as well as the CAT claims seem to be bouncing back from the -- so the second quarter of 2020 was impacted by COVID by reducing the frequency and for that matter, severity, whereas the second quarter of 2021 seems to have gotten the other end of that slingshot. We have the social inflation we've discussed with the litigation. And then we also have physical inflation. We added a slide, I think, in our investor supplement, showing like the price of lumber, which I believe our short-term supply-demand imbalances. But we're incurring those costs as we adjust our claims, as we go through the first half of this year. So I think that -- I mean, I won't say that, that is just an interim thing, but I do think it's being impacted by the rebound from COVID.

Got it. And the final question I have is the whole group is under tremendous pressure and strain due to the results that everyone has had to deal with and capital becomes an important metric here when we think about, both gross and earned. And I was wondering if you could give us an updated perspective on given what was a horrible first half, but it should be a better second half, considering your new reinsurance program? I mean, can you give us a perspective on how you're positioned, capital-wise, through the end of the year?

Yes, sure. So Brad mentioned that our unrestricted liquidity is about $28 million, and that's net of $17 million, that was contributed to the stat companies in the second quarter. Capital raising is something we watch all the time. We watch with the Board of Directors, and that is under evaluation. And one of our alternatives along with potentially at increased quota share. Obviously, the project patriot in selling the 4 states, destresses capital. The exposure management that we've talked about being both the trimming of our outwards portfolio by 10% to 15%, but also a material increase in our ceded reinsurance premium, which, of course, decreases our net written premium. We've also announced last quarter that we were exploring the potential divestiture of Interboro. These things are all really designed to reduce capital or, as you mentioned, raise capital. So I think that, that's under evaluation, and it stays under continuous evaluation by the Board.

[Operator Instructions] Our next question comes from Elyse Greenspan with Wells Fargo.

My first question is just as we think about just inflationary trends and higher loss costs that you guys discussed, how do you think about just as we think about the underlying loss ratio kind of trending throughout the rest of the year?

Yes, thanks, Elyse. I guess I'll take that one and that's kind of what Greg asked just now. We do expect that to trend much more favorably through the second half of this year, noticing that our non-named CAT really is all incurred in the first and second quarters -- or not all, but say 90%. And then that's dramatically reduced in the third and fourth quarters. And our exposure in the third and fourth quarters is the hurricanes which we feel that we've kind of crowd, given the retentions that we put on our hurricane protection. So we are -- along with the rate increases I mentioned that we feel like we'll average, 20% or even slightly over 20% in the third quarter on our personal lines. And when we combine those, we certainly would hope to see that underlying combined ratio go down.

And as we think about, I guess, like a rate leading to earn in, I guess, can you just help us in future directory, do you expect to see some of the improvement this year and then incrementally more improvement once we get into 2022?

Absolutely. So we've been with about a 10%, 10.4%, I think average rate increase on personal lines book for probably at least 4 quarters or 5 quarters. It's still kind of escalating from that, like I mentioned, 20% in Q3, and that reverts -- there's some overlapping rate increases in Q3, but then that reverts to about 15% in Q4, in Q1 and Q2. So those will earn through the portfolio. And we are already 1 to 2 years into this process. It just seems to take a long time, but we actually started quite a while ago.

Elyse, this is Brad. I would just add Page 14 of our investor supplement. Lays out a pretty nice road map of exactly what Dan is talking about and how it's trending and what the current run rate is.

Okay. That's helpful. And then as we think about, I guess, just kind of topline growth, right, as you get a good amount of rate and then kind of, as you're rejiggering the business mix. How should we think about policy and premium growth kind of trending from here?

Yes. So I think that if -- we should definitely think about 2 things. One is personal lines business and the other is commercial. So for personal lines, we would expect probably about a 10% to 20% reduction due to the exposure management with about a 15% average rate increase through the year. So you're getting about a flat premium on the shrinking exposure base of our personal lines business and that excludes, of course, the 4 states that we have sold in the Northeast. On the commercial lines business, we would expect about a 15% to 20% rate increase. We hit 18% this last quarter and with a consistent exposure base. So that gives us a topline growth there in the 15% to 20% on the commercial lines.

That's helpful. And then I know last quarter, I think you guys have seen some additional movement in your Irma losses, those kind of held steady at this point?

Yes. No increase to Irma in the second quarter. We feel good with our ultimate and still have approximately $239 million worth of IBNR reserves on top of $120 million of case reserves. So no concerns about Irma at the moment.

Okay. And then I'm assuming, quarter-to-date, it seems like you haven't seen that much on the CAT loss front, but obviously, recognizing right, like you approach the peak of hurricane season at the end of this month, but has there been anything just from a third quarter perspective that you guys are kind of monitoring on the CAT loss side?

We've had events at Elsa, did impact Florida and a few other states. But we've got a little less than 300 claims and don't expect it to be a significant event for us.

[Operator Instructions] Ladies and gentlemen, we have reached to the end of question-and-answer session, and I will now turn the call over to Dan Peed for closing remarks.

Thank you. And with that, we'll wrap up our call for today. I want to thank our entire team for their tireless efforts and also thanks to all of you for joining our call today. Thanks again.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, have a wonderful evening.