United Insurance Holdings Corp. (UIHC) Q4 2022 Earnings Conference Call March 2, 2023 5:00 PM ET

Company Participants

Karin Daly - Investor Relations & Vice President, Equity Group
Daniel Peed - Chairman of the Board & Chief Executive Officer
Bennett Bradford Martz - Chief Financial Officer

Conference Call Participants

Operator

Greetings and welcome to the United Insurance Holdings Corp. Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. Please note this conference is being recorded.

I will now turn the conference call over to Karin Daly United Insurance Holdings Corp. Investor Relations representative and Vice President at the Equity Group. You may begin Karin.

Karin Daly

Thank you, Kevin, and good afternoon, everyone. UPC Insurance has also made this broadcast available on its website at www.upcinsurance.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of UPC's earnings release and presentation in the Investors section of the company's website.

Speaking today will be Chairman of the Board and Chief Executive Officer, R. Daniel Peed; and President and Chief Financial Officer, Bennett Bradford Martz.

On behalf of the company, I'd like to note that statements made during this call that are not historical facts are forward-looking statements. The company believes these statements are based on reasonable estimates, assumptions and plans.

However, if these estimates, assumptions or plans underlying the forward-looking statements prove inaccurate, or if other risks or uncertainties arise, actual results could differ materially from those expressed in or implied by the forward-looking statements.

Factors that could cause actual results to differ materially may be found in the company's filings with the US Securities and Exchange Commission in the Risk Factors section on their most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made and except as required by applicable law, the company undertakes no obligation to update or revise any forward-looking statements.

With that, it's my pleasure to turn the call over to Mr. Daniel Peed. Dan, you may begin.

Daniel Peed

Thanks, Karin. Hello and thanks for joining us on our fourth quarter earnings call. I'm Dan Peed, Chairman and CEO of United Insurance Holdings Corp. I'm planning to overview the continuing withdrawal from personal lines; then focus on the operating results in our commercial lines business. Brad Martz will then touch on our corporate activities and results at UIHC, as well as provide some information on our cat reinsurance tower.

Over the last two years, we've been exiting UPC's personal lines business. First through the sale of renewal rights in the northeast at the end of 2020, then the sale of the renewal rights in the southeast at the end of 2021; and finally, in August of 2022, we announced the plan of withdrawal of UPC personal lines in the remaining states of Florida, Texas, Louisiana and New York.

Throughout this time, we worked closely with the Florida OIR and our other regulators. In mid-November we amended our plan of withdrawal due to severe losses incurred in hurricanes Ian and Nicole, combined with emergency orders which prohibited non-renewals.

In early December, we entered into administrative supervision with the OIR, including a requirement to continue looking for a carrier that could offer replacement policies for some or all of our policyholders.

As a subsequent event and effective February 1, 2023, with the approval of the Office of Insurance Regulation, we entered into an agreement with Slide Insurance company to offer at least 72,000 policyholders a replacement policy, which will be further described in Brad's remarks.

Due to our year-end review, in February, our gross loss estimate from Hurricane Ian increased, which resulted in the Ian UPC loss exceeding the UPC reinsurance limits available. And on February 27, United P&C Insurance Company was placed in receivership with the Florida Department of Financial Services.

Brad will provide more information and we have provided unaudited pro forma financials as of December 31 in the investor supplement to help describe the resulting deconsolidated United Insurance Holdings Corp. financials.

I'd like to turn now to the ongoing operations of our commercial lines business written in American Coastal Insurance Company. Results are broken out for personal lines and commercial lines in our earnings release as well as in the investor supplement.

First, a brief description of the underwriting metrics for commercial lines. We continue to reduce the PML to premium ratio by over 20% per year. We are executing on our plan to reduce PML exposure between 10% to 20% by peak hurricane season 2023.

The average risk-adjusted rate was up over 40% in Q4 to the highest they've been in 15 years and rates continued to accelerate even further in 2023. The average building valuation was up 11% year-over-year. The average hurricane deductible increased from 4.3% to 5.0% year-over-year across the portfolio and retention rates remained in the 80% though -- in the '80s.

Results are further described in our earnings release and investor supplement but I'd like to point out key performance indicators in our commercial lines business. Pre-tax earnings were $3.7 million for the fourth quarter and $35.8 million for the year. Pre-tax earnings for 2022, excluding Ian losses, would have been $79.2 million. Gross written premium for the quarter was $122 million, up 30.4%. Gross written premium for the year was $508 million, up 20.4%.

The combined ratio for the quarter was 89.5% with an underlying combined ratio of 68.5%. The underlying combined ratio reflects 3.9% of favorable prior year development and 24.9% of cat losses. The combined ratio for the year was 83% with an underlying combined ratio of 66.8%. The underlying combined ratio reflects a 3.6% favorable prior year development and 19.8% for cat losses including Hurricane Ian, one of the most costly hurricanes to ever hit Florida.

We were deeply disappointed with the fourth quarter developments that ultimately resulted in receivership of United P&C working diligently with the other financial services to support policyholders and complete the separation and runoff of UPC. Forward, we are mostly a specialty commercial lines business, which we expect will reflect the strong historical performance of American Coastal.

American Coastal has a high-quality portfolio with a proven track record since its inception 15 years ago. With an underlying combined ratio below 70%, the portfolio is designed to be able to absorb the expected Florida catastrophe losses while continuing to yield an underwriting profit.

The Florida cat market is significantly harder than it was in 2006 and 2007, and remains as hard as it has been in over 20 years. While this creates challenges, including cat reinsurance placements, it also creates excellent opportunities for both reinsurers and insurers to improve pricing and the quality of the portfolio. I expect these market conditions to continue to be hard for at least the foreseeable future.

With that I'll turn it over to Brad Martz.

Bennett Bradford Martz

Thank you, Dan and hello. This is Brad Martz, the President and CFO of UIHC. I'm pleased to review our financial results but encourage everyone to review the company's press release, investor presentation, and Form 10-K for more information regarding our performance.

The quarter ending December 31st, 2022 included a GAAP net loss of $294.9 million or $6.84 a share versus the net loss of $2.3 million or $0.05 a share last year and a core loss of $273 million or $6.33 a share compared to a core loss of $1 million or $0.02 a share in the prior year.

Page four of our investor presentation summarizes our results for the quarter and included $196.6 million of net retained catastrophe losses and $58.9 million of prior year reserve development. The significant increase in net loss and loss adjustment expense year-over-year was primarily driven by a re-estimation of ultimate loss liabilities across all companies and all accident years to fully align UIHC with its independent actuarial firm for both cat and non-cat losses at year-end.

Page five of our investor presentation breaks down our results by segment and indicates most of our losses were incurred in personal lines. But commercial lines did incur approximately $16 million of net losses related to current accident year catastrophes as well as about $8 million worth of reserve strengthening for non-cat losses, but despite that it was still profitable as Dan mentioned.

Our current accident year cat loss for the fourth quarter included $29 million from PCS events and approximately $160 million related to net development on Hurricane Ian and approximately $8 million for Hurricane Nicole net of reinsurance.

Our gross loss estimated from Hurricane Ian moved from $1 billion at September 30th to $1.54 billion at year-end causing our former affiliate United Property & Casualty Insurance Company also known as United P&C or UPC to exhaust all its reinsurance protection specifically for Ian.

As a result United P&C's net retained losses exceeded its policyholder surplus as of December 31st and it was put into receivership with the Florida Department of Financial Services effective February 27th, 2023.

While this was clearly not the result anyone was hoping for, it does bring closure to what was otherwise likely to be a long and challenging runoff process for our primary underwriter of personal lines business.

United P&C's receivership basically means UIHC has divested its ownership and control of this entity and will be consolidated from UIHC's consolidated financial statements at the end of February 2023.

Pages seven and eight of our investor presentation include pro forma information showing what UIHC's results would have looked like if UIHC deconsolidated UPC from its results at year-end.

While this information is unaudited and subject to change until our Form 10-K is filed, it does help make sense of our year-end numbers and shows what UIHC will look like without United P&C going forward with just American Coastal in Commercial Lines and Interboro Insurance company in Personal Lines.

Page 9 of our investor presentation shows the 2022-2023 core catastrophe reinsurance program still in force for American Coastal. After increasing American Coastal's Ian loss for our Commercial Lines segment to $680 million during the quarter, American Coastal still had over $500 million of limit remaining from the Florida Hurricane Catastrophe Fund placed at 90%.

This means that American Coastal has exposure to a 10% co-participation on future adverse development until the Florida hurricane catastrophe fund limit is exhausted, but we believe it's more likely that American Coastal's Ian loss will actually come in under $680 million resulting in favorable development and reducing net losses incurred in future periods.

American Coastal's aggregate limit remaining for subsequent events is approximately $980 million which provides nice context regarding the reinsurance protection remaining immediately after Ian. As Dan mentioned effective February 1, we entered and completed a transaction with Slide Insurance Company.

This transaction resulted in an asset purchase and services agreement with our wholly-owned MGA United Insurance Management, which is expected to provide fee income equal to 2% of gross premiums earned of the UPC policies renewed by Slide in exchange for intellectual property and data plus the reimbursement of costs associated with servicing this business such as salaries and system-related expenses. This will help with unrestricted cash flow by leveraging our people and technology to realize some service fee income in future periods.

As a result of the events occurring after year end, UIHC also incurred several nonrecurring charges in the fourth quarter including a $23 million impairment loss related to United PNC's investment portfolio, a $20 million write-down of deferred acquisition costs related to United PNC's unearned premium that will not be earned in future periods as well as the disposal of approximately $3 million of intangible assets that no longer held any value at year end.

Well there will still be some noise from United PNC's business from January and February of 2023 included in our Q1 results we believe a new era of profitability and stability has finally arrived.

The primary risks at this stage entail working with the Florida Department of Financial Services to fully separate our continuing business and getting our core cat reinsurance renewal completed on or before June 1 of this year.

That concludes our prepared remarks and we thank you for your continued interest in UIHC.

Daniel Peed

Thank you. You may now disconnect.

Question-and-Answer Session

End of Q&A