AMERICAN COASTAL INSURANCE Corp quarterly report, Q3 FY2019

Business context and reporting period

This is United Insurance Holdings Corp.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company writes residential personal and commercial property insurance, primarily in Florida and 11 other states. The filing identifies United Insurance Holdings Corp. as the registrant; the request’s “American Coastal Insurance Corp” name does not match the registrant and should be verified.

Financial results and position

Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.

• Q3 net investment income was $7.8m; nine-month net investment income was $22.7m. Nine-month unrealized gains on equity securities were $15.5m.
• Net cash provided by operating activities was $228.1m for nine months, compared with $121.6m in 2018. Investing activities used $58.3m; financing activities used $8.6m. Cash, cash equivalents and restricted cash ended at $345.4m.
• At September 30, total investments were $1,035.9m, total assets $2,754.7m, total liabilities $2,218.2m and total stockholders’ equity $536.5m. Unpaid losses and LAE were $824.1m, including $553.1m of IBNR reserves.
• Notes payable, net, were $159.5m on the balance sheet. The debt note reports total long-term debt of $162.3m before unamortized issuance costs, including $150m of 6.25% senior notes due 2027. The company reported compliance with applicable debt covenants.
• Book value per share was $11.93 at September 30, 2019, versus $12.33 at December 31, 2018. Statutory surplus for regulated entities was $425.6m, down from $437.4m at year-end; the subsidiaries met regulatory capital requirements.

Material changes versus prior comparable periods

• Gross premiums written rose 7.2% in Q3 and 13.0% for nine months, with growth in all reported regions. Policies in force increased 9.8% year over year to 625,445.
• Despite premium growth, losses attributable to UIHC widened to $28.3m in Q3, and nine-month results shifted from $11.4m of income to a $21.7m loss. The company cited higher losses and LAE, catastrophe activity, and unfavorable prior-year reserve development.
• Net loss and LAE as a share of net premiums earned increased to 76.8% in Q3 from 70.4%, and to 65.4% for nine months from 56.4%. Q3 catastrophe losses were $50.2m and prior-year adverse development was $12.2m; nine-month figures were $77.6m and $33.2m, respectively. By contrast, underlying loss ratios improved or were flat year over year.
• Higher policy acquisition costs reflected premium growth, agent commissions and managing general agent fees. Operating expenses also rose, including technology investment; nine-month G&A increased more modestly.
• Investment portfolio fair value rose to $1,035.9m from $951.8m at December 31, 2018, while cash and restricted cash increased to $345.4m from $184.1m.

Outlook, risks and unusual items

• Management expects gross written premium growth to continue through growth in current markets and expansion into additional states where the company is licensed. No quantitative earnings or loss guidance is provided.
• The 2019–2020 catastrophe excess-of-loss program provides protection up to a $3.2bn exhaustion point. The renewed quota-share agreement cedes 22.5% of subject business; management said reinsurance costs were 42.3% of Q3 gross premiums earned, versus 42.0% a year earlier. Reinsurance does not remove the company’s primary obligation to policyholders if reinsurers fail to pay.
• Management attributed reserve deterioration to higher-than-expected loss frequency and severity. Reserve estimates are judgmental and may change; actual claims may exceed recorded reserves. Hurricane Dorian and Tropical Storm Imelda losses were described as fully retained.
• Key stated risks include catastrophe exposure and concentration in Florida, reinsurance cost and collectability, regulatory and assessment changes, investment market risk, agent relationships, litigation and debt covenant/liquidity risks.
• Disclosure controls and procedures were reported not effective at the reasonable assurance level because a previously identified material weakness remained: ongoing monitoring of internal controls had not been fully performed. Management was working on remediation; the weakness was not yet considered remediated.
• The board authorized up to $25m of common-stock repurchases in July 2019; no shares had been repurchased by September 30. The company paid $0.06 per share quarterly dividends during the first three quarters and declared another $0.06 dividend in November 2019.
• No material non-claims-related legal actions or off-balance-sheet arrangements were reported. Routine claims litigation continues. Unfunded partnership investment commitments were $2.3m.

Important facts for investors to verify

1. Confirm the intended issuer: the filing is for United Insurance Holdings Corp., not a registrant named American Coastal Insurance Corp.
2. Review catastrophe exposure, reinsurance attachment and exhaustion terms, retained losses, and reinsurer credit/collection risk.
3. Assess reserve adequacy, particularly the increase in IBNR and adverse prior-year development, and track subsequent claims experience.
4. Examine whether premium growth can produce underwriting profitability given the 112.5% nine-month combined ratio and rising loss ratio.
5. Follow remediation and testing of the disclosed material weakness in internal-control monitoring.
6. Check statutory capital and dividend capacity at regulated subsidiaries, debt covenant compliance, and parent-company liquidity needs.