Greetings and welcome to the UPC Insurance Second Quarter 2017 Financial Results 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 introduce your host, Adam Prior of The Equity Group. Thank you, Mr. Prior. You may begin..

Thank you and good morning 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. 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 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 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.

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..

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. The second quarter of 2017 was the first quarter of our journey as a combined company with AmCo.

And as we mentioned in the press release, we are already starting to see some of the scale and diversification benefits of that combination. But, the addition of AmCo’s financial results and some of the merger related cost and accounting issues do impact year-over-year comparability.

So in this earnings release, we have included some new measures in the analytics to try to isolate the effect of distorted numbers that aren’t indicative of underlying operating performance. Brad and I will go through some of those measures and explain why we have included or excluded certain items.

But first, I want to give you a bigger picture sense of how our business is performing using the four main categories that impact our results. Gross written premium, reinsurance spend, cat and non-cat losses and expenses.

First top line, a lot has changed recently at UPC Insurance, but one thing that has not changed is our stellar top line performance. This quarter we grew our policy count net 4.8% almost a 20% annualized organic growth rate, which is excellent on a book of almost 500,000 policies in force. Deepak Menon and his team continue to excel.

On the commercial line side, we are maintaining our policy count and retaining business at almost 90% rate. Premium pressure seems to a stabilized and there are some very positive trends in this business. Next, reinsurance spend, on June 1, our inaugural joint catastrophe reinsurance program with American Coastal went into effect.

Total program cost was about $314 million and we realized the merger synergies we expected. The program has a higher exhausting point and a lower relative attachment point than any program we have ever placed in a very attractive pricing. We’re grateful to our reinsurance partners who have shown such consistent support for our company. Third claims.

Cat losses have hurt our company’s results the past couple of years and did again this quarter to the tune of about $22 million. But we have reached the attachment point on our non-hurricane reinsurance program, so almost all future 2017 non-hurricane cat losses will be fully seated.

In addition, the American Coastal business will reduce our future volatility from non-hurricane cat losses. American Coastal’s cat losses this quarter were zero. We recognize the cat losses are a recurring but unpredictable part of our business and we try to price our products to account for that.

In the second quarter, we implemented rate increases in four of our 12 states. These states account for over 70% of our premiums and even higher percentage of our non-hurricane cat losses. The rate changes that are now going into effect will produce approximately $40 million in annualized additional premium to help offset future losses.

Other states are currently under review. Our non-cat loss ratio is down dramatically year-over-year mostly due to the inclusion of AmCo this year, but our personal lines non-cat loss ratio has also shown steady improvement.

For the second quarter in a row we had no adverse development and the claims initiatives spearheaded by our Chief Claims Officer, Scott St. John are improving our claims metrics in several other key areas.

Finally expenses, once you reverse the distorted effect of the quarter share treaty and back out non-recurring merger costs our expense ratio is down significantly year-over-year. This is another example of the scale benefits of the AmCo merger and the increasing efficiency of UPC’s overall operation.

Given these positive trends in our four key operating levers and the new strategic horizon that have been open to us as a result of the AmCo merger, I’ve never been more optimistic about where our company is headed. At this point, I’d like to turn it over to Brad Martz to discuss our financial results in more detail.

Brad?.

Thank you, John. I’m Brad Martz, CFO of UPC Insurance; I’m pleased to review the financial highlights of our most recent quarter. But before we get those, I would like to remind and encourage everyone to review our press release and Form 10-Q, which we plan to file later today for more information regarding our results.

Highlights of UPC second quarter 2017 inclusive of our new affiliate American Coastal were non-GAAP operating income of $19.1 million or $0.46 a share. GAAP net income of $7.3 million or earnings per share of $0.17, EPS included cat loss of approximately $22 million or $0.34 a share after tax.

The underlying combined ratio was 83.7% and our book value per share increase to $12.39 per share. As John Forney mentioned, UPC is introducing a new metric this quarter called operating income, which is a non-GAAP measure that excludes non-recurring merger related expenses and non-cash charges for amortization of intangible assets, net of taxes.

However, it does include cat losses. We believe this metric provides a more accurate measure of our operating performance. Operating income increased year-over-year for the quarter, but declined approximately 19% on a diluted per share basis. For the year operating earnings per share was $0.77 versus $0.73 up 6% from the same period last year.

Since our Insurance Group is operating as a single property insurance business segment, we don’t intend to break out the contribution to net or operating income by company or line of business at this time. However, we are happy to share that AmCo was profitable and accreted the UPC’s results during Q2 consistent with our expectations.

UPC’s revenue growth for the quarter included gross premiums written of $352 million, 67% growth year-over-year, gross premiums earned of $262 million up 59% year-over-year. Net premiums earned of $160 million, up 40% from the same period a year ago.

Direct premiums written for the quarter were derived 62% from Florida, 17% from the Gulf region, 13% from the Northeast and 8% from the Southeast. Florida’s year-over-year growth was mainly driven by American Coastal’s commercial business. Organic homeowners’ growth in all other regions was up approximately 23% year-over-year.

Assumed premium of $30 million during the second quarter is commercial E&S property business assumed by our affiliate BlueLine from an unaffiliated insurer. Investment income increase to $4.5 million or 59% year-over-year and total premiums in force were approximately $987 million at the end of the quarter.

UPC second quarter losses increased 39% from $62.6 million last year to $87 million this year driven by catastrophes and the inclusion of AmCo in the current quarter.

However, our second quarter gross loss ratio of 33.2% improved approximately five points year-over-year and the net loss ratio was similar to last year, but did improve slightly to 54.5% in the current quarter.

Included in those results were approximately $22 million of net retained catastrophe losses and approximately $1.3 million of favorable reserve development on prior accident years, which added over 12 points to the net loss ratio during the quarter.

The cat losses were primarily from 10 new hail and severe convective storm events with 90% of those losses stemming from Texas, Louisiana and Florida. Excluding the impact of net catastrophe losses and prior year favorable reserve development UPC’s gross underlying loss ratio improved approximately 10 points.

And the net underlying net loss ratio improved nearly nine points, primarily due to lower attritional loss ratios of ACIC’s commercial residential business. During the quarter the company saw it’s non-loss operating expense increased approximately $34.7 million or 81% year-over-year.

$17.6 million or 51% of that change was driven by policy acquisition costs, consistent with UPC’s direct written premium growth as well as the inclusion of American Coastal and it’s variable profit sharing accruals, which added approximately $5.8 million.

The remaining $17.1 million of the change was driven by all other operating expenses, which is primarily due to amortization of intangible assets, which were $11.4 million during the quarter, up approximately $8 million year-over-year with American Coastal or AmCo being approximately $9.3 million of that number.

Legal and professional expenses were $9.3 million during the quarter up $7 million year-over-year with the merger-related expenses all related to AmCo of approximately $6.7 million. For the quarter our gross expense ratio increased 3.6 points to 29.7%. However, roughly 6.5 points of this increase was driven by three items.

First, commissions accrued by American Coastal that are included in policy acquisition cost that represented about 2.2 points, amortization and depreciation of 2.2 points, and legal and professional fees, which included the merger expenses approximately 2.1 points both of which were in general and administrative expense.

All other operating expenses were actually down 2.9 points as a percentage of gross premiums earned. UPC has also introduced the new non-GAAP measure called underlying expense that reduces operating expenses by the ceding commission income, which is truly a cost reimbursement, merger expenses and amortization expense.

Underlying expense increased approximately $11 million or 29% year-over-year. But the gross and net underlying expense ratios improved dramatically for the quarter in the year ending June 30. Our balance sheet saw a significant improvement with the addition of AmCo as well.

UPC ended the quarter with total assets of $1.8 billion including over $1 billion of cash in invested assets a significant increase to our flow of over $400 million from the same period a year ago. Total loss reserves now exceed $204 million with prior accident years continuing to develop favorably during the current quarter.

Shareholders equity was approximately $530 million with AmCo being accretive to EPS and book value per share and only about 4.5% dilutive to tangible book value reported at the end of last year. The combined statutory surplus for the group at June 30 was approximately $373 million. I’d now like to reintroduce John Forney for some closing remarks..

Thanks Brad. Before we take questions, I’ll leave you with these three thoughts. One, even including all the cat losses, non-cash amortization and non-recurring merger costs we have recognized this year all four of our geographic regions are profitable for the first six months of 2017.

Two, for the second quarter alone in 2017 the combination of cat losses, non-cash amortization and non-recurring merger costs totaled $0.61 a share compared to $0.21 a share in last year’s second quarter.

Thinking about all the positive trends and strategic opportunities I discussed in my opening remarks and that $0.40 per share delta of latent quarterly earnings power makes me very optimistic about our future. Three, you never have to worry about alignment of interest when investing in UIHC.

The board and management collectively now own almost 45% of the outstanding shares and no one has sold any stock. We’re on a long-term journey together and as always we appreciate your interest in joining us on that journey. At this time, we’d like to open up the line to questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question..

Hi. Thanks good morning. I was hoping first just to get a little bit more color just on the loss environment.

I know you said there were low attritional losses that American Coastal in the quarter but how do you see the legacy UIHC business, just how do you see the environment in Florida and any additional color there?.

Sure. This is John Forney, Elyse. I’ll start and let Brad finish. I would say, I think the third quarter in a row we’ve seen a decline in the loss ratio at UPC the non-cat loss ratio at UPC and declines in frequency and severity as well. So the trends are very good. And as I mentioned, we had no adverse development in the quarter.

I will say that the loss environment in Florida remains very difficult on a non-cat basis. The AOB industry is still very aggressive, and lawsuit activity is still continuing at a very strong level. So it’s a fight every single day.

But we are better armed now to win in that environment than we ever have been and we’re fighting hard every day to keep improving our results we’ve got room to go..

Okay, that’s great. And then I think you – at start of the call you did it, I think you gave some color on just rating environment. But, can you just talk more broadly about rates you’re filing for both in Florida and outside of Florida.

And any changes that you’ve seen since last quarter?.

Sure.

Last quarter we mentioned that we had received approval for some rate increases in Texas, Florida and New Jersey and Massachusetts and those have now been implemented and as I mentioned, we’re starting to roll through our book of business and will produce approximately $40 million of additional top line with no accompanying additional expense to those.

So that’s very powerful as it flows through over the next 12 to 18 months. We have some other filings that are pending and we have – obviously have had the cat losses that justify the rate increases and that’s the way the regulatory regimes work in the admitted market space. You can get the rate you need after you demonstrate that you have the need.

So there’s always a little bit of a lag, you get the losses and then you can follow the rates and get the rate that you need to hopefully stay ahead of it in the future. And that’s the process that we’re doing right now in all of our states..

Elyse, this is Brad. I would just add that not all 12 of the states were acted in are indicating positive rate change. So four of the 12 for instance are currently indicating negative rate change, but we’re still studying and evaluating that. We’re not necessarily going to react to that immediately.

But it really does depend on our loss experience in each and every territory..

Okay, great. And then I know there was a lot of moving parts in the expense ratio this quarter. But if I look at policy acquisition cost ratio, it did seem a little bit lower than I would have thought, if we kind of adjust out some of the merger costs. Or would you say that that’s the forward run rate.

Was there anything outside of just the merger? And I know – the cost associated with the quarter share.

Anything else if you want to highlight that might not cause your expense ratio to stay at the level we saw in the second quarter on a go forward basis?.

No, nothing further to add, obviously this quarter we saw a significant shift from policy acquisition cost to G&A.

That will flip back the other way, at the one year anniversary of the acquisition, whereby that initial first year amortization of the value of the business acquired, ceases to impact G&A but we will – see the impact of amortization of deferred acquisition costs, move back in the pack..

Okay, that’s very helpful. Thank you..

Thanks, Elyse..

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

Hi, good morning.

I have just couple of quick questions, on the aggregates cover, how much of the limit has been eroded and how much was that?.

Hi, Samir its John. I think I mentioned in my remarks that on the aggregate cover we now have hit our retention. So that $30 million has been eroded and we’re now into the $30 million of sessions.

We also remind everyone, which I know you know well that the models would suggest that 85% to 90% of our non-hurricane cat losses will be experienced in the first two quarters of the year. And so we’ve had a very good July, in terms of cat loss activity. And we don’t anticipate a significant additional non-hurricane cat loss activity for the year.

Go ahead, Brad..

Samir this is Brad. At the end of the quarter our incurred loss relative to the non-hurricane catastrophes was right at $30 million, but the IBNR we have on those 15 events eroded about $8 million of the $30 million later. But that’s completely dependent on how these storms develop, of course. But we think our IBNR load is relatively conservative..

Okay.

And then how about Q3 to date, because there – an additional limit eroded?.

None..

None, okay.

And then you guys mentioned on your prepared remarks that there has been a bit of scale that you are already seeing, is that only in the expense side or you guys started seeing benefits on the revenue side as well?.

See revenue synergies are to come. We will definitely see some revenue synergies. So far they have been on the reinsurance side, and the expense side..

All right.

And on the expense side, have we seen the book of the synergies play out or are there more to come?.

There is more to come. I would hesitate to put on a number on it, but there is some additional opportunities..

Yes. The reinsurance side, I think the largest and we have just recognized one-twelfth of that in the current quarters, so..

All right, great. Thank you..

Thank you. [Operator Instructions] There are no further questions at this time. I’d like to turn the floor back over to management for closing comments..

We just like to thank everybody for taking time to listen to the call today. As always, we appreciate your interest in our company. And we look forward to our journey together in the future. Thanks everybody..

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