Greetings and welcome to the UPC Insurance Q1 2018 Financial Results Call. [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. You are also welcomed to contact our office at 212-836-9606 and we would be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website.

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 and the company’s operations and financial results and the business and the product 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 the 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..

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 you are taking time to join us for the call.

Q1 2018 saw a continuation of some very positive trends at UPC Insurance, excellent and balanced organic growth, solid and improving non-cat loss ratios, and stable or increasing average premiums.

Because of these and other favorable trends, we were able to produce almost $25 million of EBITDA and over 13% annualized ROE in a seasonally low quarter and despite cat losses from winter storms in both the Gulf and Northeast regions.

Just after the end of Q1, we celebrated the 1-year anniversary of our merger with AmCo Holdings, the parent of American Coastal Insurance Company. The merger has exceeded our expectations, providing scale, higher margins and product diversification while opening up new pathways to future growth.

The team at AmRisc that underwrites and places business on behalf of American Coastal has lived up to their reputation as disciplined and skilled underwriters. Despite increasing competition in the quarter, we grew our commercial lines premium in-force by 4.6%, while increasing average premiums.

During the quarter, we also launched our 2018, 2019 cat reinsurance treaty placement process, which has since been completed. Our new internal brokerage team at Skyway reinsurance continued to impress by leading the placement of a program with over $3.1 billion in limit, which equates to almost 1 in 400-year coverage.

As usual, our program included a heavy dose of collateralized limit and a variety of innovative features. This year, we were able to reduce our overall retention, obtain a much lower ex-floor to retention and increased our top end protection while achieving very fair pricing from our panel of 41 reinsurance partners.

We appreciate our partnership with these companies very much. I won’t name names, but you know who you are and we thank you for your support.

We were also thrilled this year to return to the cat bond markets, with our $100 million Armor Re II placement, that offering attracted 20 investors, 15 of whom were new to the UPC program and it also achieved good pricing. In short, we continued to move forward in Q1 and have established good momentum for the rest of the year.

At this point, I would like to turn it over to Brad for his remarks..

Thank you, John and Flo. This is Brad Martz, the CFO of UPC Insurance and I am pleased to review the financial highlights of our outstanding first quarter. But before we get to those, I would like to remind and encourage everyone to review our press release and Form 10-Q for more information regarding our results.

Highlights of UPC’s first quarter 2018 included GAAP net income of $8.4 million or $0.20 a share, non-GAAP core income of $17.3 million or $0.40 a share, total revenues in excess of $180 million, an increase of 47% year-over-year and we saw continued improvement in loss ratios and our combined ratio.

Like many other insurers, UPC’s GAAP net income and earnings per share was impacted in the first quarter by new accounting treatment for net unrealized losses on equity investments, which were approximately $2.4 million in the first quarter.

This new pronouncement introduces volatility to earnings as equity values fluctuate and presents potential comparability issues with prior periods. UPC’s core income is a non-GAAP measure that removes this distorted effect by backing out both realized and unrealized gains and losses.

It also adjusts for non-cash amortization of intangibles that were roughly $9.8 million in the first quarter. This amortization expense will decline significantly beginning in the second quarter of 2018 as the largest intangible asset created by our merger with AmCo in April 2017 was fully amortized at the end of the first quarter.

Some additional insight into UPC’s revenue growth for the quarter includes gross premiums written of $280 million, up 66% year-over-year; net premiums earned of $163 million, up 52% year-over-year.

The direct written premiums for the quarter were derived 60% from Florida, 40% from outside of Florida, with a mix of 2/3 personal lines and 1/3 commercial lines. Florida’s growth year-over-year was mainly driven by American Coastal Insurance Company’s commercial premiums.

Organic personal property of gross written premium grew approximately 11% from all regions year-over-year. Our net investment income increased to $5.7 million, almost 93%, and our total policies in-force at March 31 eclipsed 542,000, with approximately $1.1 billion of premium in-force.

UPC’s first quarter losses increased 22% from $63.3 million last year to $77.2 million this year, but that produced a 27.7% gross loss ratio, which was down over 7 points from 34.8% a year ago.

Our net loss ratio faired even better, improving 11.6 points to 47.5% this quarter compared to 59.1% in the first quarter of ‘17 due in large part to our aggregate and quota share reinsurance programs that limited our net retained catastrophe losses to $6.3 million compared to $10.6 million a year ago.

Excluding the impact of net retained catastrophe losses and favorable prior year reserve development, UPC’s gross and net underlying loss ratios improved 3.5 and 5.7 points respectively due primarily to lower attritional losses of our commercial residential business and lower frequency of non-catastrophe losses during the quarter.

UPC saw its non-loss operating expense increase approximately $36.1 million or 69% year-over-year. $21.7 million or 60% of the change was driven by policy acquisition costs, consistent with premium growth as well the inclusion of American Coastal’s commercial property policy acquisition costs in the current year.

Policy acquisition costs were 20.5% of gross premiums earned compared to 19.5% in the first quarter a year ago. $14.4 million or the remaining 40% of the change was driven by all other operating expenses, which were primarily impacted by an $8.5 million increase in amortization expense related to our merger with AmCo last year.

UPC’s gross underlying expense ratio, which adjusts operating expenses for ceding commissions, earned and merger expenses, including the amortization expense was 24.6%, which was up roughly 1 point from 23.5% a year ago. We believe this is the best measure of operating efficiency given the distorted effects of the two items mentioned.

On the balance sheet, UPC ended the quarter with total assets over $2 billion, including over $1.1 billion of cash invested assets. Our liquidity included approximately $128 million of unrestricted liquidity at the holding company.

Accumulated other comprehensive income decreased approximately $17.7 million from year end due to the impact of rising rates on our fixed income portfolio. We do expect the trend of higher rates to continue. So, the company has begun to shorten the duration of our fixed income investment portfolio slightly to mitigate potential interest rate risk.

Shareholders’ equity at March 31 was approximately $535 million. And the company had a book value per share of $12.52 and $12.72, excluding the effects of accumulated other comprehensive income. Our combined statutory surplus for the group increased to approximately $402 million at the end of the first quarter.

I would now like to reintroduce John Forney for some closing remarks..

Thanks Brad. Thank you all for your time this afternoon. We appreciate the opportunity to tell you about our company and our Q1 results. If you want to know a lot about UPC Insurance in a short amount of time, please go to our website, upcinsurance.com, and click on the UPC Story link.

It will play a newly produced 4.5 minute video that will give you a great overview of our company from the viewpoint of the people that are writing our story everyday. With that, we will conclude our remarks and open up the line to questions..

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Arash Soleimani. Please proceed..

Hi, thanks. Can you talk about – I saw there was about $19 million of assumed premiums this quarter.

Can you just provide some detail on what’s in there?.

Hi, Arash, this is Brad. That’s all the commercial E&S business we are assuming from three different unaffiliated cedants..

Okay. Can you provide any detail on the cedants or....

We can’t. It’s business that is underwritten by AmRisc. So it’s business that we are very comfortable with the quality of the underwriting that takes place. As you know, AmRisc underwrites all our business for American Coastal Insurance Company.

So we are intimately familiar with their underwriting process, have the highest degree of confidence in the book of business that they source and underwrite..

Okay, thanks. And in terms of the tax rate, it looks like it was a bit higher this quarter than would have otherwise any even assumed.

Was there anything one-time in there and what would you say like a good run-rate is for you guys given tax reform?.

Yes. There was a one-time adjustment for advance premiums, but the run-rate guidance given previously, 26% is a good number..

Okay. And then you had mentioned in the release that the expense ratio was up, it looks like because of – it looks like MGAC’s paid to AmCo.

Were those unusually high this quarter or is there any reason why those will be elevated relative to the past?.

Well, they didn’t exist in the first quarter of last year. American....

Well, if we are comparing to the 3Q, 4Q of ‘17?.

No, no, their acquisition cost as a percentage of their own premiums, were in line with our periods..

Okay. And is there any number you can provide in terms of what non-cat property losses or non-cat weather losses would have been in the quarter? I know a lot of companies had elevated core loss ratios, because it technically didn’t fall into the cat line, I was curious to what extent that impacted you guys..

No, we saw improvements in our non-cat loss ratios for the quarter. We did have the non-hurricane catastrophe losses primarily driven by winter storm activity in the month of March and about 75% of the 6.3 net retained cap for the quarter was from the Northeast and most of that – the majority of that was incurred in the month of March..

Okay.

So most of that stuff actually hit the cat than what you were reporting in the catastrophe line, there wasn’t anything meaningful that would have been reflected in core losses?.

No..

Alright. Okay. And then I guess just one other question if I may is can you maybe just talk about competition on the commercial residential side of things? I know you mentioned that you had growth there and I know other carriers have been saying that they are I guess a bit nervous to grow there, because they are seeing more competition.

So can you I guess just talk about why you are more optimistic?.

Well, as you know, American Coastal is the number underwriter of commercial residential property insurance in the state of Florida and has been for quite a long time. So as a market leader, we are not new to this market and nervous about what it is or where it’s going. We understand it in-depth. We know all the major producers.

We have the greatest confidence in the way AmRisc sources and underwrites the business and so nervousness is not a trait that characterizes our approach to this market. We are, however, trying to be disciplined about what we do. As you know, the book has shrunk in recent years as there was some price competition that didn’t make sense to us.

But hopefully, you’ve garnered from the remarks that I made earlier that we see some stabilization in that. And to reiterate what I did say we grew our in-force premium by 4.6% in one quarter and our average premiums were up. So, it’s a strong quarter for us and the folks at AmRisc are doing a great job placing that ACIC business..

Is there any kind of ballpark number you can provide in terms of pricing in that market?.

Every account is different. It’s different than the personal lines market. Every account is underwritten separately. And so there is a different competition characteristic depending on the size of the account and where it is.

So you will see some flat, some up, some down, but as I said earlier, our results overall for the quarter was an increase in average premiums..

Okay. Brad, I just wanted to go back to the prior question I had asked on the policy acquisition cost. So if I am looking this quarter, it’s about 20.5% as a percentage of gross earned. Last quarter, it was about 18.3%, the quarter before, 17.4%.

So is there just some kind of seasonality in there or why is there the higher ratio in 1Q?.

Well, that’s the ramp up of amortization of deferred acquisition costs, right. So the Q1 was the final quarter – the fourth and final quarter of the amortization of the value of business acquired the largest intangible asset I mentioned in my remarks. So that amortization expense of roughly $9.3 million a quarter is done.

But over time – as we have been building and deferring new acquisition costs, we have been amortizing those new acquisition costs obviously. So yes, we are now at sort of our normal run-rate at the end of Q1..

Alright. But is the $9.3 million, does that go in – because in the release, you say that G&A was up because of amortization.

So, are you just saying that the deferred policy acquisition cost obviously that’s there, but the amortization from the merger itself, that’s all in G&A, right?.

Correct..

Okay, perfect. Alright. Thanks, guys. Appreciate the answers..

Thank you, Arash..

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

Hi, good evening. A few questions for me.

First off, what was the growth cat losses in the quarter?.

$31.3 million..

Okay, thank you.

And then as we think you guys annualized the American Coastal deal this quarter, so how do we think about the premium growth that you think you can see going forward, I mean maybe if you want to talk to the growth that you can see in the personal property and commercial property side from here?.

Sure. I think on American Coastal, I would still be relatively cautious on growth outlook for that book of business. As I said, we had a good quarter, but it’s still a very competitive market and we are very disciplined in how we underwrite that business.

So we certainly think we will experience some growth in that business and it could be higher than single-digit, but I wouldn’t count on that. We just have to see how it goes the rest of the year.

On the personal lines business, we grew our premium in-force about 2.5%, excuse me, 2.6% in the first quarter on the personal lines organically and it’s a slow quarter for new business. So, we are encouraged by that and I think we still see double-digit personal lines organic growth for the remainder of the year..

Okay.

And then if you think about your growth outlook and then maybe also the price, some of the price that you are taking across the different segments of your book now that we have annualized the deal, how should we think about the underlying loss ratio that we might see like going forward from here?.

Are you talking just on American Coastal or combined for the company now?.

Combined, but if it’s easier to talk about the two different components, that would be helpful as well..

Hi, Elyse, this is Brad. Yes, our loss performance this quarter on a non-catastrophe basis, I think is fairly representative of what we would expect to achieve..

Okay. Yes, that’s helpful. And then in terms of – you guys gave some color in terms of your – placing your reinsurance program at the start of the call.

Was there anything – just coming off of a really high cat loss year last year, was there anything that surprised you in conversations with your reinsurance partner? Is there any color you can kind of give us on the prices that you saw as you renewed the program?.

This is John, Elyse. I will take that. I don’t want to sound flipping it all, but we try not to have surprises with our reinsurance partners. And if we ever do, it’s a mistake on our part usually because we communicate with them throughout the year, not just once or twice or 2x or 3x. We visit them a lot throughout the year, not just at renewal time.

So, we have a true partnership and a relationship and we try to be transparent in our communication with them and so that eliminates almost all surprises. And so we have been talking for a long time about what they were seeing. We were telling them what we were seeing as we went into the renewal.

And so even before January 1 this year, we had already talking about our renewal for June 1, 2018. So, there really weren’t any surprises because of the ongoing dialogue of communication that we have with our reinsurance partners.

In terms of pricing, I don’t want to dodge that question, but I don’t really see any point in trying to – in bragging about a certain percentage increase or whatever it was. We have partners that we try to do win-win deals with and we are together in this for the long-term and we both felt that the pricing that was achieved was very fair.

And you will see how all the numbers shake out over the year in terms of our cedant ratio, etcetera, but we are very pleased with the program that got put together. And all of our big partners who have supported this over the last few years stepped up and wanted to do even more business with us. So, we appreciate that very much..

And where did the retention – you said the retention was down this year, where did the retention end up for you guys on the program?.

Well, this is Brad. The retention is broken down a couple of different facets. So first of that retention could be as high as 60, it could be as low as 25. 60 would be for a Florida event, 25 outside of Florida. And for a second event, the retention also drops to 25.

So, we feel like either first event or first and second event combined as measured by our equity as a percentage of our equity or our earnings revenues whatever is going to be lower than the previous year..

Okay, thank you very much. I appreciate the color..

Thanks, Elyse..

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

Good afternoon rather.

Can you guys hear me okay?.

You are breaking in and out, so we hear some of what you are saying..

Okay.

Just any gross cat losses in the second quarter thus far?.

So far, we have had a quiet second quarter in that regard..

Okay. And then Brad and I have talked a bit about the interaction about the cat and the aggregate covers.

Is there – given the cat losses today, is there some level – is there a court order of cat losses that gets locked in for the next three quarters?.

No, that’s not the way the aggregate works. The aggregate is pretty simple. Our retention is going to be 4.75% of the cumulative gross earned premium at the end of each quarter. So every quarter as our gross earned premium increases, our retention increases.

Obviously, we are in the cat business, we expect to incur additional catastrophe losses, but the bar does go up every quarter..

Okay.

And just on the G&A, when the amortization expense, you expect it to drop, I guess next quarter, what level do you think the G&A expense will be as a percentage of premiums?.

It goes back down about 4.5%..

4.5%. Alright. Thanks very much..

Thanks, Samir..

Thank you. Our next question comes from the line of Arash Soleimani with KBW. Please proceed..

John, I know you said that you are not going to provide necessarily guidance on the – or any kind of color on the reinsurance pricing, but from is there anything you can say on the premium ratio? Should we expect that to kind of stay around the same kind of ballpark area that it’s been and would it improve go up a bit? Just even any kind of high-level insight into that metric would be helpful, if possible?.

I don’t think there is any reason to think it would be materially different than what our cedant ratio has been in the past..

Okay, alright. Thank you..

Thank you. We have no further questions in queue at this time. I’d like to return the floor back over to management for closing remarks..

We appreciate everybody’s time on the call today and your interest in UPC Insurance. Thank you so much. We look forward to having a great rest of the year..

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