Greetings, and welcome to the United Insurance Holdings Corp. Q3 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Adam Prior of The Equity Group. Thank you. You may begin.
Thanks so much, 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 on its website. You're also welcome 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 as well. 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 and the company's operations and financial results and the business and the company and the products 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 new information, future developments, or otherwise. With that, I'd now like to turn the call over to Mr. Dan Peed, UPC's Chief Executive Officer. Please go ahead, Dan.
Thanks, Adam. Hello, and thanks for joining us on our Q3 Earnings Call. I'm Dan Peed, Chairman and CEO of UPC Insurance. I'm planning to offer an overview and discussion of some of our activities, and then Brad Martz will provide more specific numbers, and then we'll take questions. The Q3 results are in line with expectations and reflect continued execution of our 2021 transition plan. This plan is to reduce our growth and net hurricane exposure through increased reinsurance, exposure management, and reduced catastrophe retention levels, knowing that this is gonna drive an increased reinsurance spend. In Q3, we see the increase in net ceded earned premium, which impacts our core earnings ex hurricane down about $6 million year over year. We also see significantly reduced hurricane retention with approximately $30 million this year versus $125 million in 2020.
As we go forward, we can capture the increased reinsurance spend in our rate filings, which will continue to earn through the portfolio in 2022 and 2023. On the gross exposure reduction, our TIV in continuing personal lines is down year to date by 13.4%. We expect about another 5% in Q4 for an annual reduction near 20%. We expect to continue exposure reduction through at least September 30 of next year, 2022, and anticipate at least a 10% decline in TIV for personal lines next year. On the front end, we continue to drive compounding rate increases in nearly all states with a Q3 record average of a 13.8% across the entire personal lines renewal business portfolio.
Over the last four quarters, we have increased premiums on like-for-like renewal business of approximately $100 million, with a record $31.7 million in 3Q. Rate increases are expected to continue compounding in the low- to mid-double-digit range through at least the end of 2022. Despite these rate increases, our renewal retention, excluding the non-renewed accounts, remains over 89%. Commercial lines continue to perform well with premium year-to-date up nearly 19%, while P&L exposure is down. In American Coastal, we are a market leader in Florida commercial residential with a dozen years of expertise underwriting that portfolio. American Coastal is positioned extremely well to grow profitably in one of the hardest Florida markets since 2006. Our plan is to continue moving the book towards a 50/50 balance between commercial and personal lines over the next three years.
For 2022, we plan to maintain our exposure levels in commercial lines approximately flat. Then we anticipate an average 15%-20% rate increase and therefore a 15%-20% premium increase. Profitable underwriting doesn't just include rate increases and exposure management. It also includes risk selection. We have implemented many underwriting changes, including the development of Mosaic, a technologically advanced risk measurement algorithm that will be applied to new and renewal business to identify loss drivers. We are supplementing these types of underwriting tools with increasing physical inspections and underwriting actions for unacceptable or increased risk levels. Differentiating between risk levels can drive a significant decrease in combined ratios as a key component of our long-term formula for success as we drive toward becoming a top quartile underwriting company.
Brad's gonna comment on Florida Senate Bill 76, which was effective July 1, 2021, but I'll offer that at least initially, we've seen a drop from a peak in June of 840 lawsuits to approximately 400 per month in September and October. While it remains too early to quantify the impact on reserves and rates, it does appear to have at least stopped the runaway escalation. The pre-suit notification provisions enable a settlement in many cases and should be good for both insurers and insureds. There is significant cost savings in the reduction of litigated claims, as statistics suggest in Florida, 91% of payments made in litigated claims were made to plaintiff and defense attorneys.
The current insurance market continues to be as firm as it has in years, and the Florida market is expected to remain hard for an extended period of time, especially for personal lines and commercial residential. For UPC, we continue working through our 2021 transition year, again, with Q3 results in line with expectations. We expect to return to profitability in the Q4 of this year and continue to move towards a strong underwriting profit in 2022 and achieving targeted ROEs in 2023. With that, I'll turn it over to Brad Martz.
Thank you, Dan, and hello. This is Brad Martz, President and CFO of UPC Insurance. First, Happy Veterans Day to all our American heroes. We thank you for your service. I'm pleased to review UPC's financial results, but encourage everyone to review our press release, investor presentation, and Form 10-Q for more information regarding the company's performance. For the quarter ended September 30, 2021, UIHC reported a GAAP net loss of $14.3 million, or $0.33 per share, compared to a loss of $74.1 million, or $1.73 per share last year.
On page five of our investor presentation, you'll see a reconciliation of our core loss of $15.5 million or $0.36 a share to our underlying core earnings, which exclude catastrophe losses and prior year reserve development, which declined roughly $6 million, or $0.14 a share year-over-year. The decline in core earnings, as Dan mentioned, was primarily driven by higher reinsurance costs associated with our stated objective of reducing leverage and protecting capital. I'm proud of the hard work and good progress our team is making on taking care of policyholders in the wake of new catastrophe losses this quarter, and I believe our Q3 showed several positive signs that UIHC is moving in the right direction. Gross premiums written for the quarter declined $43.3 million, or approximately 12%, due to continued intentional exposure reduction throughout our personal lines portfolio.
We are reducing risk exposure at a faster pace than the reduction of our top line, which is a good thing. Gross premiums earned were basically flat year-over-year at $353 million for the current quarter. Ceded earned premiums were $200 million, a decrease of $34.9 million or 21% year-over-year, due primarily to more business being ceded via quota share reinsurance programs, whereby those cessions are partially offset by ceded losses and ceding commission income earned. Other items included in total revenue during the Q3 were $3.7 million of fee income, which declined slightly due to fewer personal lines policies in force. Investment income of $3.5 million, which declines about $2.5 million due to lower yields and dividend income from a smaller common stock portfolio.
Investment gains of $5.5 million were down from approximately $25 million last year. Unrealized losses from equities were $3.3 million versus $11.5 million a year ago. UPC's Q3 net loss and loss adjustment expense was $102.8 million, a decrease of $115.9 million or 53% year-over-year. Hurricane Ida was the most significant loss event in the quarter, representing $18 million of the $37 million in net catastrophe losses incurred. Cat added over 24 points to our net loss and combined ratios, which we obviously expect during hurricane season as a catastrophe-focused property underwriter. Our underlying loss in LAE was $63.8 million, down $19 million or 23% year-over-year.
This produced an underlying net loss ratio of 41.6%, which was down over two points from 43.9% in the Q3 last year. The improvement can be attributed mainly to the good performance of our commercial property business. Page six of our investor presentation breaks down our results for the current quarter and year. Here, you will see a stark contrast between our personal lines and our commercial lines businesses that we're working hard to correct. Page seven of our investor presentation summarizes the 5 key underwriting improvement initiatives that the company has been working diligently on over the past year to improve our personal lines results. We firmly believe that getting more rates, being more selective, shedding unprofitable risks, cutting policy acquisition costs, and being more disciplined with agency management is moving the company toward restoring underwriting profitability.
Pages 8 through 11 of our investor presentation provide some evidence that our underwriting actions are having the intended result on our risk portfolio and should lead to better results over time. Page 12 of our investor presentation provides some more insight on our litigation experience in Florida during the current period. As you will see, since peaking in June, new lawsuits have declined significantly, which is partially offset by an increase in claims following the new pre-suit notice requirements of Senate Bill 76. It's still too early to say whether or not Senate Bill 76 will have a positive impact on our loss costs or our loss reserves.
The early indications of successful speedy resolution are encouraging. UPC's operating expenses were $76.3 million. It decreased to $16.1 million or 17% year-over-year. This decline was driven mainly by higher ceding commission income in the current quarter, which is reflected in lower acquisition costs. However, our net expense ratio increased approximately 0.8% to 49.8% inclusive of ceded premiums. On the balance sheet, UPC's assets total $3.3 billion, including cash and investments of $1.16 billion. The modified duration of our fixed income holdings decreased to 3.9 years with an average overall composite rating of A+ at September 30. Reinsurance recoverable on loss reserves increased primarily as a result of our estimated ultimate direct and ceded losses for Hurricane Ida.
GAAP equity attributable to UIHC stockholders declined approximately 19% from year-end to $320.4 million, with a book value per share of $7.42, and tangible book value per share of $5.28. Unrestricted liquidity at the holding company was approximately $36 million at quarter end. That concludes our prepared remarks, and we're now happy to take any questions.
Thank you. Ladies and gentlemen, at this time, we will conduct our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Greg Peters with Raymond James. Please state your question.
Hey, good afternoon. I would like to focus first on your comment, Dan, that your ultimate objective is to get to, I think you said a 50/50 mix of personal lines and commercial lines. Is that right? Did you put a time period on when you might get there?
Yes. That's been our plan for this year. We've said three years, approximately three years, and we are moving in that right direction.
Yeah. With the retention, it seems like, I mean, even though you sort of limited in how much you can non-renew, and it seems like your retention ratios are holding up pretty well despite the rate action. You know, I think you listed Interborough, this potential sale that. Are there other operations you're looking at, you know, or states that you're considering more aggressive actions in?
Our exposure management plan has several different levers that we can use in the various different states. Each state is somewhat different. As you know, also, we sold the renewal rights to the four Northeast states with a quota share treaty behind that.
Yeah.
On December thirty-first of last year, so that's reduced our exposure significantly. On the commercial side, you can do a lot more stuff with deductibles and specific buildings and distance to the coast and those type of exposure management. So we're considering all of those and also for our planning for next year, like I said, we plan to be down by at least 10% more by September thirtieth of next year.
I noticed you said that and you said also, I think in one of the slides, you expect to return to profitability next year. I guess, you know, when I think about you've done a great job with exposure management and, you know, your reinsurance has protected you from these big name storms. But in the first and Q2 of this year, and then certainly last year, you've been affected by these, you know, the proverbial kitty cat storms. How should we think about that for the first half of next year? Maybe that's more wrapped up into a discussion of how your reinsurance renewal is coming.
Yeah. We do have exposure in the first and Q2 to what we call AOP cat or kitty cat. That tended to be more so in the Northeast, which is one of the reasons that we have exited most of the Northeast except for Interboro in New York. We actually in Uri this year had a loss, but we were protected pretty well by our AOP cat tower. We are planning at the moment to renew that tower although we may have to change things around a little bit down in the bottom layers because as you've said, that's been hit several times. It's really too early to say how that reinsurance renewal is going. We're working on it.
Yeah. I figured as much. I guess just the last question is, you know, we're watching. Just from a big picture perspective, the slow-moving train wreck that's happening in the auto insurance space too, because of inflation reduced or increased frequency severity. You know, some of the companies, some of the specialty companies in that market have really laid down the gauntlet, like we're not gonna write new business until we get our pricing right.
I guess, you know, when I think about, you know, at least on your end you're doing fine on the commercial side, but on the personal line side, it feels like, you know, there should be, you know, and I'm sure you guys have looked at it. You know, why can't you just stop writing new business altogether? Or, you know, you've cut your commission rates. How can you affect the inflow of new business more dramatically, you know?
So-
for the near term until the profitability.
Yes.
Is reset?
Good question. I think our new business flow is down to about 5% of what it was a year ago, a year and a half ago. We've effectively almost shut off new business. The accounts that do make it through are generally very nice accounts. Just you know everything you would think, new roofs and good valuation and good rate. We have almost stopped on new business in most of the cat areas. We have stopped on new business in some specific exposure zones that we don't like, such as inland risks and stuff like that. We're very aware of that and almost all of our premium is coming out of our renewal business and our increased rates on our renewal business.
Got it. Well, the commercial business certainly had a great quarter and year, and hopefully that will continue as we look to 2022 and 2023.
Yeah. The commercial business is as you know, I've been involved with that for 12 years, and it is especially attractive in a firming and the hard market. Obviously I mean, we are in a you know, quite firm market, I believe one of the hardest markets we're gonna see in Florida since 2006. We expect that to go well through 2022 and 2023.
Yeah. Makes sense. Thanks for the answers.
Yep. Thank you.
Thank you. Once again, to ask a question, press star one on your telephone keypad. To remove yourself from the queue, press star two. Our next question comes from Bill Dezellem with Tieton Capital Management. Please state your question.
Thank you. I have two questions. First of all, what led to the modest unfavorable $1.9 million pre-tax prior-year reserve adjustment?
Hi, Bill. This is Brad. There were a few older catastrophe events that we saw some strange development on, so we decided to do a little bit of strengthening. You know, it was not systemic throughout the portfolio, just a few events. Remember, we're getting dozens and dozens of these non-hurricane events on top of hurricanes. All reserves for the named windstorms last year still look good. In fact, we had some redundancy there, but that redundancy benefited the reinsurers. These are smaller events that were within our retention.
Great. Thank you, Brad. Dan, I think you mentioned that you're in the process of renewing the reinsurance agreement. Would you talk about kind of your objective of the total cat loss exposure this season versus what you are wanting to accomplish for next season?
Sure. We're kind of in a continual state of renewing our reinsurance treaties. Our AOP cat treaty comes up January 1, and we also renew part of our quota share as well as part of our cat excess. From a general perspective, our view is to have a. I'll start with cat, which is hurricane cat, which is the easiest to describe at the moment, and that's mainly a June 1 treaty renewal, so we aren't fully into that. At the moment, we're very happy with our current retention. We have $15 million per event, and we put on top of that a $31 million aggregate for our pooled companies.
In this case, like with Ida, it hit not only Louisiana, but it continued on and up through New York, where we have a $3 million retention in our Interboro Insurance Company in New York. That's where the $18 million comes from in Ida. Obviously, Ida was a very, you know, a significant event, and we felt like that retention was good there. On the AOP cat, we are starting with the same framework that we had last year. Again, we think that served us pretty well in Winter Storm Uri. This is just something that we have to underwrite against.
We may also put in some type of aggregate protections or quarterly aggregate protections, but that is yet to be determined. In general, our cat retentions at the moment, we expect to be pretty consistent with where we are right now this year in 2021.
Thank you. Dan, let me ask one more question from a point of ignorance, if I may please. That your maximum cat loss that you talked about this year would be $31 million, and yet I think you had $37 million here. Would you talk about that gap, please?
Yeah. Just to be, you know, careful with our words. We have a pooled group that's three of the companies, American Coastal, Family Security and UPC, and that has a $31 million aggregate, but it applies to named storms, and there is a $3.5 million. A very small storm may not get into that pool, some of them that, you know, you never even really hear about. Like I mentioned, we had $3 million in Interboro that was not part of that pool. We also had a retention in Journey Insurance Company, which is not part of that pool.
Those miscellaneous ones and in some ways, the smaller hurricanes can add up just as fast or faster than the large hurricanes which run into our protection.
That's very helpful. As you think about that, does that alter your thinking about next year's retention or are you comfortable accepting that it sounds like roughly $3 million per smaller event in some of these non-pooled companies?
I would say it's a matter of negotiation each year. But the structure that we came up with, we feel protects us from the severe loss. When you get into the, you know, very small and modest losses, $1 million or so, that can be almost like another fire or another thing. They get reported on a cumulative basis, but they impact our income statement more like a large fire does.
Great. Thank you for taking the, remedial question.
Oh, no problem.
Thank you. A reminder to ask a question, press star one on your phone now. We'll pause for a few moments while we poll for questions. Thank you. Our next question comes from Greg Peters with Raymond James. Please state your question.
Hey, guys. Just one other follow-up detail, but just, you know, we're obviously seeing some movement in the expense ratio. Maybe can you provide some guidance on how you think that might look next year, either on a gross or a net basis, or both? Just to give us some parameters.
Hi, Greg. This is Brad. On a net basis, you're probably gonna see it very comparable to this quarter. You know, it's unlikely we'll move away from quota share in the short term. You know, depending on how much we see, that's gonna obviously have a significant impact on the net expense ratio. You know, our preference is always to point to the direct or the gross expense ratio, which you know, has been trending favorably. We might see a slight improvement of up to a point next year. Again, that's going to be dependent upon our overall premium volume.
Wouldn't the cutting of commissions, you know, have a favorable effect on that as we think about next year?
Yes. That is part of why we have an outlook for a reduced expense ratio on a direct basis. Again, you know, as depending on our capital needs and how much premium we're ceding, reinsurance costs can be very distortive to that. On a net basis, you know, that may get washed out, but on a direct basis, absolutely.
Got it. All right. Thanks for your answers.
Thank you. Once again, to ask a question, press star one. Thank you. There doesn't appear to be any additional questions at this time. I'll turn it back to management for closing remarks. Thank you.
Okay, thanks. And with that, we'll wrap up our call for today. I wanna thank our entire team for their tireless efforts, and thanks to all of you for joining our call today. Thanks again.
Thank you. That concludes today's call. All parties may disconnect. Have a great evening.