United Insurance Holdings Corp. (NASDAQ:UIHC) Q2 2022 Earnings Conference Call August 8, 2022 5:00 PM ET
Company Participants
Karin Daly – Vice President, Equity Group
R. Daniel Peed – Chairman & Chief Executive Officer
Bennett Bradford Martz – President & Chief Financial Officer
Operator
Hello, and welcome to the United Insurance Holdings Second Quarter 2022 Financial Results Conference Call and Webcast. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.
It’s now my pleasure to turn the call over to Karin Daly, Vice President with the Equity Group. Please go ahead, 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 the 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 vary materially may be found in our filings with the U.S. Securities and Exchange Commission in the Risk Factors section of our most recent annual report on Form 10-K or 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, we undertake 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?
R. Daniel Peed
Thanks, Karin. Hello, and thanks for joining us on our second quarter earnings call. I’m Dan Peed, Chairman and CEO of UPC Insurance. I’m planning to offer an overview of some of our activities in the second quarter, and then Brad Martz will provide more specific numbers.
The second quarter was busy. During the quarter, we closed on restructuring both our personal lines and commercial lines businesses. In personal lines, we closed the merger of Family Security Insurance Company and UPC effective May 31, with UPC as the surviving entity. In our commercial lines business, we merged Journey Insurance Company and American Coastal Insurance Company effective June 1, with American Coastal as the surviving entity. Both of these were done to separate out our personal lines and commercial lines businesses, simplifying the structure from five writing companies to three, reallocate capital and reduce expenses.
Turning to results. The main theme in our personal lines business is continued derisking necessary to right-size the portfolio and reduce the amount of catastrophe reinsurance that was needed at the 6/1 renewal. We continued to shrink the personal lines portfolio with the TIV of the core portfolio down 16% year-over-year and the hurricane PML down approximately 24% when considering the Southeast renewal rights transaction. This enabled the successful 6/1 catastrophe reinsurance renewal. However, shrinking the personal lines portfolio creates a temporary headwind on as the gross earned premium shrinks significantly faster than the ceded earned premium. Gross earned premiums were down by 14% due mostly to the sale of the Southeast renewal rights, while net earned premiums were down by 23%. This is reflected in our personal lines ceded earned premium ratios at 68.9%, up from 59.7%.
Losses in both catastrophe and non-catastrophe claims continue to be impacted by increasing inflation and excessive litigation, driving increased severity. These factors drove a poor underwriting performance with a core loss of $64.3 million, which included a $43.6 million valuation allowance against our deferred tax asset. The core loss excluding the valuation allowance was $20.6 million, which has improved by about $4 million from the $24.6 million in second quarter ’21. However, our commercial lines business performed well in the second quarter, as I’ll describe in a minute.
On the underwriting activity side, we continue to achieve compounding rate increases along with exposure management and risk selection activities. In personal lines, we achieved average rate increases across our core portfolio of 18.8%. These are compounding with the 11.5% rate increases achieved in 2021. We are also continuing with our insurance to value initiatives, which are delivering 12.9% average increase in our personal lines core portfolio. Between rate and valuation, we’re achieving an average 31% year-over-year on renewal accounts.
For commercial lines, we had a good quarter with a combined ratio of 61.5% and an underlying combined ratio of 70.2%, down slightly from 72.4% in the first quarter of ’22. We wrote $181 million of gross written premium for the second quarter, surpassing for the first time our personal lines, which wrote $179 million. This resulted in pretax earnings for commercial lines of $18.8 million for the second quarter versus $11.6 million in the first quarter and $5.6 million in the second quarter of ’21. Commercial lines average rate increased by nearly 20%, and we anticipate continued growth of 20% or more for at least the next 12 to 18 months.
Florida litigation continues to see the total number of lawsuits when adjusted for notice of intent to litigate, decreasing over the last quarter from peak rates in June and July of ’21. We believe that the provisions of SB 76 will begin to help the excess litigation issues in Florida as SB 76 applies to an increasing percentage of lawsuits. We also believe the provisions in SB 2-D and 4-D will favorably impact excessive litigation in Florida. However, much of the benefit were near to claims with a date of loss after July 1, 2021, the effective date of SB 76.
As a subsequent event, on August 1, Demotech downgraded UPC from A for exceptional to M for moderate. UPC is participating in the Florida market stabilization arrangement through Citizens Property Insurance Corp. that is effective through June 1, 2023. Under the arrangement, Citizens will assume by endorsement 100% of UPC’s liability for any covered loss payable but unpaid under certain circumstances. The Florida OIR has a great summary of the arrangement and frequently asked questions on its website that I invite you to check out.
Our subsidiaries, American Coastal Insurance Company and Interboro Insurance Company, continue to be rated A minus — continue to be rated A, exceptional by Demotech. And American Coastal, Interboro and UPC are all rated A minus by Kroll Bond Rating Agency.
In summary, our second quarter reflected lots of change. We continued to derisk the personal lines portfolio, which drives the headwind of decreasing net earned premium in personal lines. Our core loss is due to poor performance in our personal lines business as well as a large valuation allowance against the deferred tax asset. However, the core loss excluding the valuation allowance improved on a year-over-year basis by approximately $4 million.
We continue to experience inflation and excessive litigation levels in Florida, causing significantly increased severity in current and prior accident years. We restructured the company through the merger of FSIC into UPC for personal lines and Journey Insurance Company into American Coastal Insurance Company for commercial lines. This will simplify our structure and reduce expenses. Our commercial lines business is performing well and is positioned for profitable growth with a market-leading position in a specialty commercial niche.
And lastly, we expect the Florida residential market to remain hard for the foreseeable future due to a skeptical and hard capital and reinsurance market, recently elevated catastrophe activity and continued headwinds created by excessive litigation levels.
With that, I’ll turn it over to Brad Martz.
Bennett Bradford Martz
Thank you, Dan, and hello. This is Brad Martz, President and CFO of UPC Insurance. I’m pleased to review UPC’s financial results but encourage everyone to also review our press release, investor presentation and Form 10-Q for more information regarding the company’s performance.
Highlights for the quarter ended June 30, 2022 included a GAAP net loss of $69 million or $1.60 per share compared to a net loss of $23.5 million or $0.55 a share last year and a core loss of $64.3 million or $1.49 per share compared to a core loss of $24.6 million or $0.57 a share a year ago. On Page 4 of our investor presentation highlights that our core loss included $20.6 million of net retained catastrophe losses or approximately $0.38 a share after tax, $7.8 million of prior year reserve development, approximately $0.14 per share after tax and the $43.7 million noncash valuation allowance charge, which was slightly over $1 per share. In total, these items reduced our GAAP EPS and our non-GAAP core earnings per share by approximately $1.53 per share.
Catastrophe losses included 16 new PCS events in the quarter, and the prior year reserve development was driven by reserve strengthening across several smaller PCS events within our retention. The real noise in the quarter came from our decision to record a valuation allowance against 100% of UIHC’s deferred tax asset. This accrual was deemed necessary due to uncertainty about our ability to utilize the roughly $190 million net operating loss carryforward, given the cumulative results over the past several periods.
Gross premium written for the quarter of $360.1 million declined $66.3 million or approximately 16%, and gross premiums earned of $305.8 million decreased about 14%, consistent with our expectations of less exposure, offset by higher rates on our personal lines portfolio. Pages 7 and 8 of our investor presentation continue to demonstrate that we are getting significantly more rate in both personal lines and commercial lines.
Ceded earned premiums were $194.4 million, which compared favorably to $211 million in the same period a year ago due to our lower exposure base as well as the reduction of our quota share cession rate from 23% to 18% at June 1. Other items included in total revenue during the current quarter were $6.4 million of fee income that increased $2.4 million year-over-year due primarily to the renewal rights sale of our federal flood book of business; net investment income of $3.1 million, which declined year-over-year due to lower invested assets; and net unrealized losses from equity securities of $5.1 million, which were $7.5 million lower than the prior year.
UPC’s second quarter net loss and loss adjustment expense was $90.1 million, a decrease of $28 million or approximately 24% year-over-year. The current accident year catastrophe losses added over 18 points to our net loss and combined ratios with the impact of prior year reserve development, adding 8 — or excuse me, 7 points on those same ratios.
Our underlying loss and loss adjustment expense was $61.6 million, down $16.4 million or 21% year-over-year. This produced an underlying net loss ratio of 55.5%, which was up nearly 2 points compared to last year. Page 5 of our investor presentation summarizes our results by line of business and continues to show profitable results for commercial lines, but weather-related losses, inflation litigation led to very disappointing results on the personal line side.
UPC’s operating expenses were $56.5 million, a decrease of $11.4 million or almost 17% year-over-year. This decline was driven mainly by lower acquisition costs from agent commission reductions in our personal lines business. Our direct expense ratio shown on Page 5 of our investor presentation increased 2.5 points year-over-year to 26.5% when comparing operating expenses, excluding ceding commissions to our gross premiums earned. However, our net expense ratio increased 4 points to 50.7% inclusive of reinsurance costs. Expense reduction and cost containment has been a significant challenge with inflationary pressures and so much change in our personal lines risk portfolio but is a very high priority for us going forward.
Page 6 of our investor presentation includes balance sheet highlights to help reconcile some of the significant changes this period. Our GAAP equity attributable to UIHC stockholders declined to $167 million with a book value per share of $3.85 and tangible book value per share of $1.77. Rising interest rates have led to valuation declines in our fixed income investment portfolio. And this, combined with the valuation allowance on deferred tax assets related to unrealized losses, caused our accumulated other comprehensive loss to decrease to $48.9 million at June 30. This impacted book value per share and tangible book value per share by $1.13 per share. The statutory policy over surplus for our Group at the end of the second quarter was approximately $202 million.
That concludes our prepared remarks for today. We thank you for your continued interest in UPC Insurance.
Operator
Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Question-and-Answer Session
End of Q&A
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