Filing summary
Entity note: The supplied filing is United Insurance Holdings Corp. (UPC Insurance), not a filing identified as American Coastal Insurance Corp. American Coastal Insurance Company is one of United Insurance Holdings’ insurance subsidiaries. The 10-Q covers the quarter and nine months ended September 30, 2018; amounts below are in millions unless stated otherwise.
Business context and reporting period
The company is a property and casualty insurance holding company focused on residential and commercial property coverage, with significant Florida exposure and operations across 12 states. It reported one business segment. Policies in force rose 11.3% year over year to 569,444. In August 2018, it formed majority-owned Journey Insurance Company (JIC) with Tokio Marine Kiln; the company contributed $40 million and its partner $20 million.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Gross premiums written | $295.9 | $267.2 | $960.2 | $788.4 |
| Net premiums earned | $171.3 | $152.5 | $507.5 | $419.3 |
| Total revenue | $187.7 | $171.1 | $542.9 | $471.8 |
| Net income (loss) attributable to UIHC | $(11.7) | $(28.0) | $11.4 | $(16.9) |
| Diluted EPS | $(0.27) | $(0.66) | $0.27 | $(0.47) |
| Combined ratio | 117.4% | 141.6% | 102.5% | 118.4% |
| Underlying combined ratio | 98.8% | 81.5% | 91.8% | 84.5% |
Q3 net loss and loss-adjustment expenses were $120.6 million, and the net loss ratio was 70.4%. Nine-month loss and LAE were $286.4 million, with a 56.4% net loss ratio. Q3 catastrophe losses were $34.6 million net of reinsurance, versus $82.6 million a year earlier; nine-month catastrophe losses were $58.3 million versus $115.0 million. Favorable prior-year reserve development was $2.7 million in Q3 and $4.2 million year to date.
Investment income was $6.9 million for Q3 and $19.7 million for nine months. Net unrealized gains on equity securities were $6.1 million and $5.0 million, respectively; these gains are included in reported income. Operating cash flow for the first nine months was $112.6 million, compared with $84.3 million in 2017. Cash, cash equivalents and restricted cash totaled $306.1 million at quarter-end.
At September 30, total investments were $937.8 million, total assets $2.32 billion, total liabilities $1.77 billion, and total stockholders’ equity $548.9 million. Unpaid losses and LAE were $528.8 million, and reinsurance recoverable on paid and unpaid losses was $433.6 million. The balance sheet reports notes payable of $160.7 million; the debt note lists $163.8 million of carrying value before any related presentation differences. The $150 million senior notes bear 6.25% interest and mature in 2027. The company reported compliance with debt covenants.
Material changes versus prior periods
- Gross written premiums grew 10.7% in Q3 and 21.8% for the first nine months. Growth included higher personal and commercial property premiums and a larger assumed-premium contribution.
- Q3 net loss narrowed by $16.3 million year over year, mainly reflecting higher earned premiums and lower catastrophe losses. The nine-month result moved from a $16.9 million loss to $11.4 million of income.
- The nine-month comparison benefited from having nine months of AmCo operations in 2018 versus six months in 2017, lower catastrophe losses, and approximately $7 million of prior-year merger expenses that did not recur.
- The underlying combined ratio worsened despite lower reported combined ratios, rising to 98.8% from 81.5% for Q3 and 91.8% from 84.5% for nine months. Management cited higher underlying losses and expenses; 2018 presentation of ceding commissions also changed.
- Investment portfolio fair-value movements reduced accumulated other comprehensive income to $(13.7) million from $9.2 million at year-end 2017. Adoption of a new accounting standard moved a prior $9.3 million after-tax equity-security gain from accumulated other comprehensive income to retained earnings.
Outlook, risks, contingencies and unusual items
- Management said it expects gross written premium growth to continue through expansion in existing markets and entry into additional licensed states; it provided no numerical earnings or revenue guidance.
- The 2018–19 catastrophe reinsurance program provides up to $3.1 billion of protection, with a stated first-event retention of $60 million in Florida and $25 million outside Florida. Reinsurance reduces losses but leaves the company exposed if reinsurers cannot meet obligations.
- Hurricane Florence affected the third quarter; management estimated $35 million of retained pre-tax losses, net of reinsurance. Hurricane Michael made landfall on October 8, after quarter-end; the company’s preliminary estimate of retained pre-tax losses was $25–$35 million, net of reinsurance. These estimates are subject to change.
- On October 5, the company contributed $25 million to FSIC. On November 6, ACIC and IIC paid dividends of $50 million and $1.764 million, respectively, to the parent. The board also declared a $0.06-per-share quarterly dividend.
- Disclosure controls were deemed ineffective at quarter-end because previously identified material weaknesses remained in third-party IT control monitoring and controls over income taxes, acquisition accounting and investments. Remediation was underway but had not yet been validated as effective.
- Insurance subsidiaries met stated regulatory capital requirements; combined statutory results were a $13.1 million loss for Q3 and $8.3 million income for nine months. Legal matters were described as ordinary-course claims litigation, with no material non-claims-related legal actions reported.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for United Insurance Holdings Corp.; American Coastal Insurance Company is a subsidiary.
- Track Hurricane Michael’s ultimate retained losses and recoveries, along with claims development from Florence and prior storms.
- Assess whether premium growth can improve underlying profitability, given the increase in underlying combined ratios.
- Review reinsurance recoverables, counterparty collectability, and the coverage and retention terms of the catastrophe program.
- Monitor remediation and independent testing of the disclosed material weaknesses, as well as statutory capital, dividend capacity and debt covenant compliance.