John Forney - President, Chief Executive Officer Brad Martz - Chief Financial Officer Adam Prior - Equity Group.

Greetings and welcome to the United Insurance Holdings Corp., Fourth Quarter and Year End 2018 Conference 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, this conference is being recorded.

I would now like to turn the conference over to your host, Adam Prior of the Equity Group. Thank you. You may proceed..

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 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 in 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 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..

During the quarter we gained approval in Florida for our first A.M. Best-rated product from our newly formed subsidiary Journey. Subsequent to year-end we wrote our first Journey policy and there will be many more to come.

That speed to market, Journey wasn’t even formed until the end of September and we were in the market with an approved admitted market product two months later and I’ve already put business on the books. Thanks to the great team at AmRisc for all their efforts to help us get Journey launched and into the market so quickly.

This will be a big vehicle for growth for us in 2019 and beyond as we add states and products to it. Last positive I’ll highlight, during the quarter we extended our quota share reinsurance program with Munich Re (A+), Trans Re (A+) and Gen Re (A++) and negotiated renewal of much of our 2018 loss effected cat layers at favorable pricing.

We appreciate the strong partnership mentality demonstrated by our reinsurers and we look forward to working with them to complete the remainder of our 6/1 renewal.

Please refer to pages 17 and 18 in the investor presentation to get a better appreciation for the depth of our reinsurance programs, which cover a variety of risks for our various entities and in aggregate total over $4 billion. At this point I’d like to turn it over to Brad for his remarks. .

Thank you, John and hello, this is Brad Martz, the CFO of UPC Insurance. I’m pleased to review UPC’s financial highlights and would also like to encourage everyone to review our Press Release and Investor Presentation for more information.

The highlights of the fourth quarter included first solid top line growth with premiums written increasing nearly 16% and gross premiums earned totaling $308 million. For the year gross premiums earned grew to just under $1.2 billion, an increase of 20% year-over-year. Second, UPC saw significant improvements in its underlying results.

Our underlying combined ratio was 81.3%, an improvement of over 6 points from the same period a year ago, driven by positive movement in both the underlying loss and expense ratios.

This helped bring our underlying combined ratio down to 89.1% for the year, which is up almost 4 points year-over-year due to catastrophe losses being 5 points higher in 2017.

Third, UPC had a core loss of $1 million or $0.02 a share, a decrease of $34 million from the prior year due primarily to catastrophe losses of $41.7 million or $0.72 a share compared to only $1.4 million or $0.02 a share in the same period a year ago.

For the year UPC had core income of $16.5 million or $0.38 a share, which declined $18.4 million from the prior year, primarily from a $24.2 million decline in merger and amortization expenses before tax.

Finally UPC experienced favorable income tax adjustments in both the current periods and the prior period, as well as the change in federal affective rates year-over-year, so the company’s results before income tax provided a much clearer measure of performance.

For example, if you take UPCs fourth quarter loss of $19.4 million and add back the catastrophes of $41.7 million, which are not comparable year-over-year, as well as the net investment losses of $12 million which are not operating, you get $34.3 million of income before tax, that’s a 20% increase over the prior year using the same calculation.

Similarly, for the year a similar result occurs as we compare our income before tax and just remove the net investment losses, which are almost all unrealized. UPCs pretax income also increased from $843,000 in 2017 the $3.4 million in 2018. This year-over-year improvement is inclusive of all cat losses, which are compatible for the full year.

In short, management feels the true earnings power of the business remains strong despite all the items impacting comparability and we believe it’s reasonable that margins will prove further in 2019.

Additional details regarding UPCs total revenue for the quarter, beginning with direct premiums written, they consist of 71% personal lines and 29% commercial lines. Commercial lines grew 19% year-over-year, slightly faster than personal lines but just under 15%.

Roughly 59% of our growth in direct written premiums came from Florida and the northeast remained our fastest growing region up 16% year-over-year led by New York. Assume commercial, excess and surplus lines premiums grew 122% to $22.9 million during the quarter.

A 17.1% change in ceded earned premiums for the quarter was slightly higher than the 12.4% growth in gross earned premiums due to lack of any quota share sessions for the one month of December 2017. Investment income increased 42% year-over-year to $7.5 million in the quarter.

Realized gains of $2.3 million and unrealized losses from equities of $14.3 million resulted in a $12.6 million decline in revenue for the quarter and $7.6 million for the year due to the new GAAP accounting rule change John mentioned previously.

Other revenue decreased $6.6 million or 63% year-over-year due to the change in our presentation as seeding commission is earned implemented during the second quarter of 2018. The seeding commissions earned during the current quarter were $10.7 million. Moving on to losses.

UPCs fourth quarter losses increased $50 million or 69.4% from $72.1 million last year to $122.1 million this year due to a $9.7 million or 13.7% change in non-cat loss, consistent with our premium growth and a $40.3 million dollar increase in catastrophe losses.

This produced a gross loss ratio of 39.6% up 13 points year-over-year and a net loss ratio of 67.2% up nearly 24 points from last year. Net retained cat losses during the current quarter added 13.5 points to the gross loss ratio and 23 points to the net loss ratio.

Hurricane related losses totaled $28.2 million and the remaining $13.6 million was due primarily to the increased retention of non-hurricane events under the company’s aggregate reinsurance program.

Reserve development on prior accident years of $8.5 million added nearly three points to the gross loss ratio and five points to the net loss ratio during the quarter. For the year this was $4.3 million or about four-tenths of 1% on total reserves of nearly $200 million and a premium base of $1.2 billion gross earned, which is not very significant.

Despite this development UPC saw favorable trends in the non-cat loss ratio by accident here across all lines of business both inside and outside of Florida, with the biggest improvements coming from personal lines in Florida.

Excluding the impact of networking catastrophe losses in reserve development, UPCs gross and net underlying loss ratios improved nearly three points compared to the same period a year ago.

UPC’s non-loss operating expense decreased $5.9 million or 7.2% year-over-year during the quarter, driven primarily by an $8.5 million decrease in amortization expense related to our 2017 merger with American Coastal. However, underlying expense presents more compatible result after adjusting for seeding commissions.

It increased $1.1 million or 1.4% year-over-year. The underlying gross expense ratio improved 2.5 point 24.6% and the underlying net expense ratio improved over three points to 41.7%. Moving to our balance sheet, UPC ended the year with total assets of over $2.3 billion, including nearly $1.1 billion of cash and invested assets.

At December 31 the duration of our fixed maturities declined to 3.5 years while yield-to-maturity improved to 3.15% and a 100% of our holdings were investment grade with an overall composite rating of A+.

Unrestricted liquidity at the holding company was approximately $71 million at the end of the year and shareholders’ equity attributable to United Shareholders decreased to $520.2 million with a book value per share of $12.10 and $12.31 excluding accumulated other comprehensive income.

Lastly tangible book value per share, excluding OCI increased over 3%, despite occurring approximately $100 million of catastrophe losses during 2018. And now, I’d like to reintroduce John Forney for some closing remarks. .

Thanks Brad. It was not a very satisfying 2018 for you or for us. Much higher than normal cat activity sapped our earnings, but even while processing almost $100,000 claims, about four years’ worth, during one year we continue to build a strong diversified franchise.

2019 is off to a good start relative to the past couple years in terms of cat activity. So we feel optimistic that the investments and operational improvements we have made have a good chance to help us produce much better results in 2019 and beyond. We appreciate your support for you UPC as we continue to move forward.

That concludes our remarks and we’re happy to take questions at this point. .

[Operator Instructions]. Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please do with your question. .

Hi, good evening.

My first question, can you give us where hurricane Michael losses were booked for the quarter on both a gross and net basis?.

Hi Elyse, this is Brad. Hurricane Michael for the quarter was booked $128 million and net was $27 million. .

Okay and then so was the remainder of the cat in the fourth quarter really just related to how the retention works on your reinsurance program or were there other smaller events. .

Yes, there were about $4 million worth of new events during Q4 that were truly new and the remaining little $9.6 million, $9.7 million was related to the increased retention related to the events from prior accident quarters in 2018..

Okay, perfect. And then the unfavorable development in the quarter, the $8.5 million or so, can you just give us a little bit more color on you know what that stemmed from. I’m assuming most likely, probably accident year ’17, but if we can just get a little bit more color there that would be helpful. .

Yeah, we missed on the most immature accident quarters from 2017, 3Q, Q4 of last year. So we had to take a more conservative approach to our development factors this year.

I mean the primary driver, that’s Florida non-cat d homeowner’s severity you know, we are actually seeing lower frequency and the rate changes we’ve implemented are obviously helping the accident year loss ratio improvement we described and show in the Investor Presentation.

So we remain pretty optimistic about the trends, but we obviously missed on our expectations development. .

Okay, and then you mentioned like rate changes, you guys also mentioned that you know a bunch of last quarter as well. We were discussing some of kind of the one-off non cat losses.

Can you give us you know an update may, specific to Florida and some of the rate you know? Is there more rate that you guys are looking to take as we think about 2019?.

We are looking to take more rate in Florida. We have a pre-filing pending. So you’ll continue to see that occur, but you know as we mention our non-cat loss indications for the year in Florida were down 5 points year-over-year. So we feel good about how we are positioned. .

Okay, that’s helpful. In terms of the tax rate, there was some true-up that impacted the current quarter.

Do you have an outlook for how we should think about the tax rate for 2019?.

Outlook on tax rate remains unchanged at 26%. You are just going to see some unusual results when you have low levels of income given the size of some of our temporary differences.

So we understand the frustration there, trying to make sense of the tax results, but posting a stronger booking come right relative to taxable income will help correct that. .

Okay, and then my last question. I mean you placed part of your reinsurance program to start the year then. Also some of it comes up at mid-year.

As we get closer to mid-year are you guys anticipating you know making any significant changes to your outbound reinsurance purchase this year?.

Well, we purchased you know slightly more reinsurance to account for the growth, but the structure that we’ve employed has served us so well over the last couple years that we don’t anticipate any major changes in the structure and we’re in the midst of discussions with all our major partners right now about the exact layering and pricing.

So it’s business as usual in terms of reinsurance placement. We have very strong partners and we’re working with them right now to get the placement down. .

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

You’re welcome. .

Our next question comes from a line of Marcos Holanda with Raymond James. Please proceed with your question. .

Hey, good evening guys, thanks for taking my question. .

Thank you. .

So Elyse touched on some of the questions I wanted to ask, but I guess just on the underlying combined ratio target of 85%, obviously be it above or below the 5 year average, I was just hoping you guys could give us some more color on how the company is set up to achieve that and if there is a time frame for it?.

Timeframe is immediate. We expect to hit that target and price our products accordingly each and every year. Obviously there’s volatility and uncertainty in our business and that’s reflected in and that history, but timeframe is immediate. .

And you know I would say, it really is the 5 year average that we’ve had.

You know it’s a couple of basis points off and there’s a distortion in last year’s underlying combined ratio relative to ‘17 because of the effects of the different sessions in each year under our quota share and the effects of the unwinding of the DAC that goes along with the merger that we did with American Coastal, those distort things.

When you look at underlying stuff, if you took out all quota share sessions, out underlying, our cat loss ratio growth before any sessions to reinsurers went down significantly.

So the underlying book of business is performing at a level that supports that underlying combined right now and so it’s not – it doesn’t even suppose any improvement in our underlying results to get to that, if that makes sense. .

Yeah, thanks for that. And then another one on the Journey sub. You mentioned in your remarks, you guys already wrote a business for it with AmRisc. But I think you said it was an admitted policy. I always thought the whole rational for the rating was to get on the non-admitted side of the business.

Is that reasonable or are you just guys playing it right into that type of business in 2019?.

Journey is an admitted market company and always has been. The play on Journey is not to get into the surplus lines space. We’ve accomplished that through Blue Line. The play on Journey was to get into different markets on the personal lines side and different products on the commercial lines side and that’s what we’ve done.

The first policy that we wrote with Journey was a commercial lines, admitted market, apartment building in Florida, which typically has gone to ENS markets because apartment lenders require an A category, A and best rating.

We now have an admitted market A category, A and best rating in Florida, which is kind of a category buster and gives us a really nice advantage. .

Okay great, thanks for that. And then just lastly, do you guys think you know the losses in the retro market will have any meaningful impact on your insurance pricing when it comes up to renewals. .

Time will tell. Obviously there’s been a lot of stress in the reinsurance markets, you all know that as well as we do. But the partners that we do business with are looking at the long term like we are and over the long term we expect our partners to make money not every year.

Just like over the long term our results are going to be a lot better than they’ve been in 2018 and ’17. So yeah, there’s been some pain on the reinsurance side and we want our reinsurance partners to feel like they have a profitable long term relationship and that it’s a win-win.

So that’s why I said, we’re working with them right now to try to find a, you know a fair way to do it..

Okay, thank you for your answers. .

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

Yes, good afternoon gentlemen. .

Hey Chris!.

Hey! I guess my first question, just kind of following up on the leases about the unfavorable development. So it sounds like that’s the most recent accident year. So I guess how is that going to factor into your core loss ratio picks for 2019. .

As I mentioned, it’s going to have a trickle-down effect to the most immature accident quarters. .

But it’s immaterial really in the scheme of things on our overall loss ratio; it’s you know less 20 basis points or something like that. If that – I mean it’s just not a material number and it was you know sort of a prudent year end thing for us to do.

But again as I said, the non-cat loss ration picks, factoring all that in, in Florida are 500 basis points lower year-over-year. So we’re seeing a material improvement in the business and an immaterial amount of development for the year doesn’t impact that. .

Got it, and just – you know I understand it’s immaterial, but I guess just where was the development coming from? Is that kind of more like are you seeing AOB creep back into like the core business or anything like that? Just any other colors you could give or any other color you can give on…?.

No AOB is not a significant factor for us as we’ve talked about before. We’ve been reducing – we’ve never had a lot of business in tri-county; we haven’t written any new business and dates since I’ve been at this company six and a half years ago. We stopped writing new business in Broward some time ago. We’ve been non-renewing policies down there.

Our premiums are up 30% or 40% down there and our loss ratio, non-cat loss ratio in the tri-county year-over-year 2017 - 2018 was down 12 points, 1200 basis points, 12 full percentage points of non-cat loss ratio. So no, that’s not what’s driving it. .

Exactly! And again I got to reiterate, 2018 we feel like we are as well reserved as we’ve ever been. So we are taking all this information into account setting year end reserves on the current accident year as well. So we don’t expect that to continue and I have no concerns about the development whatsoever. .

Okay, got it, that’s very helpful. I guess another one on the reinsurance costs. It looks like the CD premiums were up to 40% versus 36.7% I guess you know a year ago.

So I guess just could you unpack that on what’s driving that increase? Is it more coverage; I guess just like how should we think about like the higher costs in terms of what more United is getting for that?.

It’s a full 12 months of the commercial residential business produced by American Coastal is what it is. In 2017 you only had nine months of that. The commercial res has the higher seeding ratio relative to the first in lines as you might expect, so that’s the change. .

And the other change is that there wasn’t any quota share in place for the month of December 2017. So we had one full month more of 20% sessions on our quota share in 2018. So no, we are not paying more if there’s just some comparability issues. .

Okay, got it, that’s makes sense. And then just I was looking at the slide deck that you guys had, was there anymore Irma loss creep, because I think the last number I had for you guys was like $747 million and then slide 18, of the presentation has like a number $900 million.

So is $900 million the new number for that?.

It’s not very new, but it’s been – it’s a number from a couple months ago. .

Okay, so 900 million is your latest gross number for Irma, correct? Hello!.

Yes. .

Okay, got it guys, just want to confirm that. And then I’m just wondering a little bit on switching to micro. I know you guys had a big range like the $50 million to $120 million gross originally. Now it’s only like $8 million above that at the $128 million.

I guess are you still seeing any signs that Michael could have lost creep similar to Irma or are you seeing like the attorneys making their way up north or anything like that?.

We are not seeing any evidence of that on our book. .

Okay, great. And then just one other, just kind of a question about like just the collateral like piece.

I know -- like I think I asked the question last quarter about just in terms of I guess you guys released collateral and I understand it’s not a commutation and I think you said like losses would have to develop like twice as much for that to like matter.

So I guess just how – do you need to plug that going into like the next program, because the collateral is released. I mean how does that work in terms of you know that piece of the program? Is like – is the reinsurer already using that to write new business, because you don’t think that the losses are going to hit that.

I guess it’s a buffer table question in essence. But I guess just if we are leasing that collateral, the reinsurers are going to start using that to write.

How does that impact your program and what you have to purchase you know going forward?.

I hasn’t impacted us at all. The collateralized programs have worked exactly as they were designed to work and exactly as they were advertised. There is buffer tables that allow collateral release after certain periods of time.

If losses developed up into those areas where collateral was released, the reinsurers are obligated to post new collateral and we clawed back. That’s worked multiple times on Irma and flawlessly within a matter of days, and so we don’t have any concerns about the collateralized reinsurance or how it works.

And the partners that we deal with have access to a lot of capital, so they are not strapped for cash and you know trying to beg and borrow to make ends meet. They have capital to support their past obligations and their future obligations and so we haven’t seen any signs of distress from our reinsurance partners on the collateralized side. .

Got it. And is there any concern on the reinsurers side just in terms of the loss creep and then having something like you know maybe return collateral after it’s been released on a proper table.

Is there any concerns on the reinsurers side, like maybe they wouldn’t want to participate on a program going into next year or they would have higher rates if that were an issue. .

Well, nobody has enjoyed the Irma loss creep at all yeah. Obviously the numbers have gone up significantly for the industry as a whole over a long period of time and you know that’s not something that anybody planned on.

You know for us our losses on Irma as a percent of our market share in the affected areas are still less than they should be than our markets showing the PCS number, and so relatively speaking we performed well on Irma.

It doesn’t mean that we’ve enjoyed it or that our reinsurers have enjoyed paying losses that far after the fact and everybody’s got a background on how they price their products going forward. So you know that’s how it works and we all have to figure out what exactly that means. .

Great, well thanks for all the answers.

Best of luck in 2019!.

Thank you. We now like to turn the call back over to management for closing remarks. .

Okay, well thank you so much everybody for joining us on the year-end call. We really appreciate your interest, we appreciate the good questions and we look forward to continued dialogue over the rest of 2019, so thank you again. .

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