Greetings and welcome to the United Insurance Holdings Corp. Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, that this conference is being recorded. I will now turn the conference over to our host, Adam Prior of The Equity Group. Thank you. You may begin.

Thanks so much, 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 we'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 and 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 third quarter earnings call. I'm Dan Peed, Chairman and CEO of UPC Insurance. I'm planning to offer an overview and discussion of some of our activities, and then Brad Martz will provide more specific numbers, and then we'll take questions. The third quarter results are in line with expectations and reflect continued execution of our 2021 Transition Plan. This plan is to reduce our growth and net hurricane exposure through increased reinsurance, exposure management, and reduced catastrophe retention levels, knowing that this is going to drive an increased reinsurance spend. In 3Q, we see the increase in net seated earned premium which impacts our core earnings as Hurricane down about $6 million year-over-year. But we also see significantly reduced hurricane retention with approximately $30 million this year versus $125 million in 2020. As we go forward, we can capture the increased reinsurance spend in our rate filings, which will continue to earn through the portfolio in 2022 and 2023. On the gross exposure reduction, our TIV and continuing personal lines is down year-to-date by 13.4%. We expect about another 5% in Q4 for an annual reduction near 20%. We expect to continue exposure reduction through at least September 30 of next year 2022 and anticipate at least a 10% decline in TIV for personal lines next year. On the front-end, we continue to drive compounding rate increases in nearly all states, with a third quarter record average of 13.8% across the entire personal lines renewal business portfolio. Over the last four quarters, we have increased premiums on like for like renewal business of approximately $100 million with a record $31.7 million in 3Q. Rate increases are expected to continue compounding in the low to mid double digit range through at…

Thank you, Dan. And hello, this is Brad Martz, President and CFO of UPC Insurance. First, happy better and state all our American Heroes, we thank you for your service. 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. For the quarter ended September 30, 2021 UIHC reported a GAAP net loss of $14.3 million or $0.33 a share compared to a loss of $74.1 million or $1.73 per share last year. On Page 5 of our investor presentation, you will see a reconciliation of our core loss of $15.5 million or $0.36 a share to our underlying core earnings, which excludes catastrophe losses and prior year reserve development, which declined roughly $6 million or $0.14 a share year-over-year. The decline in core earnings as Dan mentioned was primarily driven by higher reinsurance costs associated with our stated objective of reducing leverage and protecting capital. I'm proud of the hard work and good progress our team is making on taking care of policyholders in the wake of new catastrophe losses this quarter. And I believe our third quarter showed several positive signs that UIHC is moving in the right direction. Gross premiums written for the quarter declined $43.3 million or approximately 12% due to continued intentional exposure reduction throughout our personal lines portfolio. We are reducing risk exposure at a faster pace than the reduction of our top-line, which is a good thing. And gross premiums earned were basically flat year-over-year at $353 million for the current quarter. Ceded earned premiums were $200 million, a decrease of $34.9 million or 21% year-over-year, due primarily to more business being ceded via quota share reinsurance programs, whereby those sessions are partially offset by ceded…

Thank you. And ladies and gentlemen, at this time we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Greg Peters with Raymond James. Please state your question.

Hey, good afternoon. I would like to focus first on your comment stand that your ultimate objective is to get to, I think you said a 50-50 mix of personal lines and commercial lines. Is that right? And did you put a time period on when you might get there?

Yes, that's been our plan for this year. And we've said three years, approximately three years and we are moving in that right direction.

Yeah. With the retention, it seems like, I mean even though you sort of, limited in how much you can non-renew and it seems like your retention ratios are holding up pretty well, despite the rate action. I think you listed Interboro this potential sale of that. Are there other operations you're looking at or states that you're considering more aggressive actions in?

Our exposure management plan has several different levers that we can use in the various different states, and each state is somewhat different. As you know, also, we sold the renewal right to the Northeast states with a quota share treaty behind that on December 31 of last year, so that's reduced our exposure significantly. On the commercial side, you can do a lot more stuff with deductibles and the specific buildings and distance to the coast and those type of exposure management. So we're considering all of those and also for our planning for next year, like I said, we plan to be down by at least 10% more by September 30 of next year.

And when I think of -- I notice you said that and you said or so I think one of the slides, you expect to return to profitability next year. I guess when I think about, you've done a great job with exposure management and your reinsurance has protected you from these big name storms. But in the first and second quarter of this year and then certainly last year, you've been affected by the proverbial kitty cat storms. How should we think about that for the first half of next year? Maybe that's more wrapped up into a discussion of higher reinsurance renewals coming?

Yeah. So, we do have exposure in the first and second quarter to what we call AOP cat or kitty cat. That tended to be more so in the Northeast, which is one of the reasons that we have exited most of the Northeast except for Interboro in New York. We actually -- and during this year, we had a loss, but we were protected pretty well by our AOP cat tower. We are planning at the moment to renew that tower, although we may have to change things around a little bit down in the bottom layers, because as you've said that's been hit several times. It's really too early to say how that reinsurance renewal is going. We're working on it.

Yeah, I figured as much. I guess, just the last question is, we're watching just from a big picture perspective, the slow moving train wreck that's happening in the auto insurance space too because of inflation, reduced or increased frequency severity. And some of the companies, some of the specialty companies in that market have really laid down the gauntlet like we're not going to write new business until we get our pricing right. And I guess when I think about at least on, you're doing fine on the commercial side, but on the personal line side, it feels like there should be -- and I'm sure you guys have looked at it, why can't you just stop writing new business altogether? Or you've cut your commission rates, how can you effect the inflow of new business more dramatically for the near-term until the profitability reset?

Yeah. Good question. And I think we have our new business flow is down to about 5% of what it was a year ago, a year and a half ago. So we've effectively almost shut off new business. The accounts that do make it through are generally in very, very nice accounts. Just everything you would think, new roofs and good valuation and good rate. And so we have almost stopped on new business in most of the categories and we have stopped on new business in some specific exposure zones that we don't like, such as inland risks and stuff like that. So we are very aware of that and almost all of our premium is coming out of our new renewal business and increased rates our new renewal business.

Got it. Well, the commercial business certainly had a great quarter and year, and hopefully that will continue as we look to '22 and '23.

Yeah, the commercial businesses as you know, I've been involved with that for a dozen years, and it is especially attractive in a firming and the hard market and obviously we are coming into, I mean we are in quite firm market, I believe one of the hardest markets we're going to see in Florida since 2006. So we expect that to go well, through '22 and '23.

Yeah, makes sense. Thanks for the answers.

Yeah. Thank you.

Thank you. [Operator Instructions] Our next question comes from Bill Dezellem with Tieton Capital. Please state your question.

Thank you. I have two questions. First of all what led to the modest unfavorable $1.9 million pre-tax -- or prior year reserve adjustment?

Hi, Bill. This is Brad. There were a few older catastrophe events that we saw some strange development on. So we decided to do a little bit of strengthening, but it was not systemic throughout the portfolio, just a few events. And remember, we're getting dozens and dozens of these non-hurricane events on top of hurricanes. But all reserves for the name windstorms last year still look good. In fact, we had some redundancy there, but that redundancy benefited the reinsurers. So these are smaller events that were within our retention.

Great. Thank you, Brad. And then Dan, I think you mentioned that you're in process of renewing the reinsurance agreement. Would you talk to kind of your objective of the total CAT loss exposure this season versus what you are wanting to accomplish for next season?

Sure. So we're kind of in a continual state of renewing our reinsurance treaties. But so our AOP cat treaty it comes up January 1, and we also renew part of our quota share as well as part of our CAT excess. So from a general perspective on our view is to have -- I'll start with CAT, which is hurricane cat, which is the easiest to describe at the moment, and that's mainly June 1 treaty renewal. So we aren't fully into that, but at the moment we're very happy with our current retention. We have $15 million per event and we put on top of that a $31 million aggregate for our pooled companies. And in this case, like with Ida, it hit not only Louisiana, but a continued run up through New York where we have a $3 million retention in our Interboro Insurance Company in New York. So that's where the $18 million comes from in Ida. But obviously, Ida was a very significant event and we felt like that retention was good there. And AOP cat we are starting with the same framework that we had last year. Again, we think that served us pretty well in Uri, and this is just something that we have to underwrite against. We may also put in some type of aggregate protections or quarterly aggregate protections, but that is yet to be determined. So in general, our CAT retentions at the moment, we expect to be pretty consistent with where we are right now this year in '21.

Thank you. Dan, let me ask one more question from a point of ignorance, if I may please. That your maximum cat loss that you've talked about this year would be $31 million and yet I think you've had $37 million here. Would you talk about that gap please?

Yeah. And just to be careful with our words, so we have a pooled group that's three of the companies American Coastal, Family Security and UPC and that has $31 million aggregate, but it applies to main storms and there is a $3.5 million, so a very small storm may not get into that pool some of them that you never even really hear about. But then also like I mentioned, we had $3 million in Interboro that was not part of that pool and then we also had a retention in Journey Insurance Company, which is not part of that pool. So those miscellaneous ones, and in some ways the smaller hurricanes can add up just as fast or faster than the large hurricanes, which run into our protection.

That's very helpful. And so as you think about that, does that alter your thinking about next year's retention? Or are you comfortable accepting that, it sounds like roughly $3 million per smaller event in some of these non-pooled companies?

I would say it's a matter of negotiation each year. But the structure that we came up with we feel protects us from the severe loss. And when you get into the very small and modest losses of $1 million or so that can be almost like another fire or another thing they get reported in accumulative basis, but they impact our income statement, more like a large fire does.

Great. Thank you for taking the remedial question.

No problem.

Thank you. [Operator Instructions] Your next question comes from Greg Peters of Raymond James. Please state your question.

Hey, guys. I just had another follow-up question [technical difficulty]. We're obviously seeing some movement in the expense ratio. Maybe can you provide some guidance on how you think that might look next year, either on a gross or net basis or both, just to give us some parameters?

Hi, Greg, this is Brad. So on a net basis, you're probably going to see it very comparable to this quarter. It's unlikely we'll move away from quota share in the short-term, but depending on how much we see that that's going to obviously have a significant impact on the net expense ratio. So our preference is always to point to the direct or the gross expense ratio, which has been trending favorably and we might see a slight improvement of up to a point next year, but again that's going to be dependent upon our overall premium volume.

Won't the agent, cutting of commissions have a favorable effect on that as we think about next year?

Yes. That is part of why we have an outlook for a reduced expense ratio on a direct basis. But again, as depending on our capital needs and how much premium we are ceding reinsurance costs can be very distorted to that. So on a net basis that may get washed out, but on a direct basis absolutely.

Got it. All right. Thanks for your answers.

Thank you. [Operator Instructions] There doesn't appear to be any additional questions at this time. I will turn it back to management for closing remarks. Thank you.

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

Thank you. That concludes today’s call. All parties may disconnect. Have a great evening.