United Insurance Holdings Corp. (NASDAQ:UIHC) Q2 2023 Earnings Call Transcript

United Insurance Holdings Corp. (NASDAQ:UIHC) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Hello, and welcome to the American Coastal Insurance Corporation Second Quarter 2023 Financial Results Conference Call and Webcast. [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, Investor Relations with The Equity Group. Please go ahead, Karin.

Karin Daly: Thank you, Kevin, and good afternoon, everyone. American Coastal Insurance Corporation has also made this broadcast available on its website at www.amcoastal.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of the latest 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 Martz. On behalf of the company, I'd like to note 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 these forward-looking statements. Factors that could cause actual results to differ materially may be found in the company's filings with the U.S. Securities and Exchange Commission, in the Risk Factors section in our 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.

Robert Peed: Thanks, Karin. Hello, and thanks for joining us on our second quarter earnings call. I'm Dan Peed, Chairman and CEO of American Coastal Insurance Corporation. I'm planning to overview the activities of the second quarter and the year-to-date numbers, including touching on the operating results of our continuing operations and specifically our commercial lines segment. I'll then turn it over to Brad Martz, who will expand on the financial results for continuing operations. We've immediately completed our transition to a commercial specialty insurance business underwritten through American Coastal Insurance Company. The commercial lines segment now comprises over 97% of the second quarter gross written premium and 92% of the gross earned premium.

In light of this transition to a predominantly commercial specialty business, we announced July 27 that we have changed the holding company name from United Insurance Holding Corporation to American Coastal Insurance Corporation. And effective August 15, we will begin trading with the new ticker, ACIC. We believe this better reflects the future direction of our company as American Coastal Insurance Company has a 15-year track record of consistent product and financial performance in Florida. Back to the numbers. Given the extreme variances introduced by the accounting for discontinued operations, I consider the most applicable numbers to be quarterly and year-to-date results from continuing operations in the commercial lines segment. As such, I'm going to highlight the results from the commercial lines segment, and then Brad is going to focus mostly on continuing operations, which includes our continuing personal lines operations through Interboro.

For the commercial lines segment, the pretax income was $25.4 million in the second quarter and $64.3 million year-to-date. The net loss ratio was 22.0% in the second quarter and 19.7% year-to-date, in line with expectations. The net expense ratio was 37.4% in the second quarter and 36.5% year-to-date, both down about 8 points from 45% last year. The net combined ratio in the commercial lines segment was 59.4% in the second quarter and 56.2% year-to-date, down from 61.5% and 68.0% year-over-year, respectively. Now addressing the commercial lines segment. Prior year development continued to be favorable at 7.2% in the second quarter and 5.3% year-to-date. The cat loss ratio was 8.4% in the second quarter and 5.4% year-to-date, which is in line with expectations despite the very active cat season this spring.

The underlying combined ratio was 58.2% in the second quarter and 56.1% year-to-date, down from 70.2% and 71.3% year-over-year, demonstrating the improvement in the underlying profitability produced by the commercial lines portfolio. To highlight a few underwriting metrics on the commercial lines portfolio, the total insured value exposure is down 12.8%, while the probable maximum loss at the 100-year return period is down 21% as modeled using AIR both on a year-over-year basis. In contrast, the gross written premium was up 31% in the second quarter and 33.8% year-to-date. Valuation is up an average of 8%. Submissions were up 8.2%, and the hit ratio for quoted renewal business decreased from 85% to 81%. Looking forward, we continue to believe the legislative changes made in Florida will prove to be an effective mitigation of some of the excessive litigation issues over the last half dozen years.

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The pre-suit notification of intent to litigate, the reduced time to report, the elimination of one-way attorney fees and assignment of benefits as well as other changes will work their way through the system to reduce loss costs and subsequently, insurance rates. However, it will take some time for these changes to work their way through the system. But in the near term, it does appear to have mitigated some of the reinsurers' negative sentiments surrounding the Florida exposure. In conclusion, the Florida residential cat market remains hard. It will take some time for reinsurers and investors to get comfortable with the exposures and challenges that Florida offers. While the hard market creates challenges, it also creates an excellent opportunity for American Coastal having the #1 market share for admitted commercial residential exposure in Florida.

I expect the market to remain hard for at least the near and intermediate terms. With that, I'll turn it over to Brad Martz.

Bennett Martz: Thank you, Dan, and hello. This is Brad Martz, the President and CFO of American Coastal Insurance Corporation. I'm pleased to review our financial results but encourage everyone to review the company's press release, investor presentation and Forms 10-Q and 10-K for more information regarding our performance. Pages 3 and 4 of our investor presentation provide a summary of the quarter ending June 30, 2023, which included core income of $28.4 million or $0.65 a share versus $8.5 million or $0.20 a share last year, which grew 236% year-over-year recast for discontinued operations. Net income from continuing operations of $22.6 million or $0.52 a share compared favorably to $5.8 million or $0.14 a share in the same period last year, driven by strong underwriting performance in our commercial lines segment, which was partially reduced by investment losses of $5.2 million or about $0.12 a share net of tax in the current period.

Our combined ratio for the second quarter improved over 9 points to 67.7% versus last year, fueled by a $36 million or 17% increase in premiums written year-over-year despite our intentional reduction in policies and risk exposure and the reduced premiums written in the personal lines segment. The successful placement of our new catastrophe reinsurance programs for American Coastal and Interboro were the most significant accomplishments during the second quarter with more overall protection against severity and the lowest retention we've had against the Florida hurricane over the last decade at just $10 million. Page 5 of our investor presentation provides a breakdown of our results for the quarter and year against the recast 2022 amounts, which highlight gross premiums earned growing 22.2% year-over-year in the second quarter, helping to overcome increased catastrophe losses and decreased revenue from more premiums ceded as well as nonrecurring investment losses.

Despite these items, year-to-date net income from continuing operations grew to $54.3 million, an increase of $48.7 million or 870% year-over-year. Page 6 of our investor presentation breaks down our results by segment with $25.4 million of pretax profit from commercial lines and a $1.3 million loss from personal lines, reduced by a $3 million loss primarily related to interest expense at the holding company. During the current quarter, we determined that certain nonrecurring revenue and expenses of the personal lines segment, derived from our former affiliate, United P&C, should also be included now as part of discontinued operations. Accordingly, Page 7 of our investor presentation summarizes the impact of this change to help reconcile our year-to-date results.

The net impact was immaterial with roughly $1.1 million moving from discontinued operations to continuing operations with no impact to net income or book value reported last quarter. Page 8 of our investor presentation provides balance sheet highlights as of June 30, including stockholders' equity increasing to $106.5 million or $2.45 a share, an increase of about 27% from the prior quarter. Unrealized losses on our bond portfolio declined to $21.1 million or approximately $0.49 a share, indicating an underlying book value per share of $2.94. Cash and invested assets totaled nearly $242 million with total assets of over $1.44 billion. Reinsurance plays a critical role in our capital management strategy, and the increase in our quota share reinsurance on June 1, 2023, from 10% to 40% will reduce the company's net premium risk, which in turn will help improve our risk-based capital ratio this year but also has the impact of ceding away a higher portion of our expected underwriting profit in the short term.

However, our improving statutory capital position will allow us to write and retain more profitable commercial lines business over the long term. Pages 9 and 10 of our investor presentation show the final 2023, 2024 catastrophe reinsurance programs for American Coastal and Interboro. The structure graph for American Coastal on Page 9 shows the enduring effects of the Florida Hurricane Catastrophe Fund and FORA layers to the tower, which is not drawn perfectly to scale here, and how the 2 20% quota share programs interact with the remaining private open market limit. Of the $371 million of private market occurrence limit, about $236 million or 64% is reinstatable, with 95% of that cost prepaid. And when combined altogether, it represents roughly $1.1 billion of occurrence base limit and $1.3 billion of aggregate limit.

The company also utilized its captive reinsurer to take a small participation, 9% on Layer 1 of the American Coastal program, but it did not participate on Interboro's program. Thus, the captive could have the effect of increasing our consolidated group retention from $10 million to $12.3 million if a Florida event fully exhausts the first layer of American Coastal's program. That completes our prepared remarks, and we are now happy to take any questions.

Operator: [Operator Instructions]. If there are no questions at this time, I'll turn the floor back over to management for any further or closing comments.

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