Business context and reporting period
This is United Insurance Holdings Corp.’s (UIHC; Nasdaq: UIHC) Form 10-K for the fiscal year ended December 31, 2020, comparing results primarily with 2019. The request identifies American Coastal Insurance Corp.; the filing is for UIHC, whose American Coastal Insurance Company (ACIC) is a subsidiary. UIHC is a property and casualty insurer focused on personal and commercial residential property, particularly in catastrophe-exposed markets. Florida represented 40.1% of policies in force and 47.4% of total insured value at year-end.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $846.7 million | $825.1 million |
| Net premiums earned | $765.7 million | $752.4 million |
| Gross premiums written | $1,456.9 million | $1,380.3 million |
| Net loss attributable to UIHC | $96.5 million | $29.9 million |
| Diluted loss per share | $2.25 | $0.70 |
| Operating cash flow | $(10.5) million | $149.0 million |
| Cash, cash equivalents and restricted cash | $301.5 million | $287.1 million |
| Total investments | $995.1 million | $1,011.7 million |
| Debt, stated principal | $160.4 million | $161.6 million |
| Book value per share | $9.19 | $11.69 |
The net loss ratio rose to 79.4% from 66.4%; the expense ratio was 47.1% versus 46.3%, and the combined ratio worsened to 126.5% from 112.7%. The underlying combined ratio, excluding current-year catastrophes and prior-year reserve development, improved to 88.9% from 95.4%. Net investment income fell 20% to $24.1 million. Net realized investment gains were $66.7 million, while unrealized losses on equity securities were $27.6 million.
Net cash from investing activities was $36.6 million, including substantial investment sales; financing activities used $11.7 million, including $10.3 million of common dividends. Management said available capital resources and operating cash were sufficient for anticipated working-capital needs. Gross unpaid losses and loss adjustment expenses increased to $1,090.0 million from $760.4 million; reinsurance recoverables rose to $821.2 million from $550.1 million. These are material insurance obligations and recoveries, not standalone measures of available liquidity.
Material changes versus 2019
- Gross written premiums increased 5.5%, mainly from rate increases and growth in Gulf and Southeast regions; lower assumed premiums partly offset growth. Net premiums written declined to $701.0 million from $747.0 million as ceded premiums increased.
- Catastrophe losses net of reinsurance rose to $294.5 million from $96.9 million. Thirteen named or numbered storms made landfall in the company’s footprint, versus five in 2019. Catastrophes added 38.5 percentage points to the 2020 combined ratio, versus 12.9 points.
- Prior-year reserve development was favorable by $6.8 million, compared with unfavorable development of $33.1 million in 2019. Management attributed the 2020 benefit mainly to better-than-expected non-catastrophe losses and claim payments.
- Equity holdings were sharply reduced: total equity securities fell to $7.4 million from $116.6 million. The company reported $66.7 million of net realized investment gains and a $27.6 million unrealized equity loss.
- Stockholders’ equity declined to $417.6 million from $523.9 million, and return on equity was negative 20.2% versus negative 5.6%.
Outlook, management commentary, risks and unusual items
No quantified earnings or premium guidance is provided. Management said it planned to pursue premium growth through rate changes while reducing risk exposures. Actions included raising rates where supported, increasing minimum deductibles, tightening roof and eligibility standards, restricting peak-exposure areas, and exiting business lacking scale or profitability. Management said these measures slowed policy growth but were intended to improve portfolio risk and profitability. Policies in force increased only 0.6% to 630,991.
The 2020 catastrophe excess-of-loss program provided up to approximately $3.3 billion of protection for specified catastrophe losses; the company also maintained quota-share and aggregate protection. Reinsurance does not remove UIHC’s primary obligations to policyholders, and recoveries depend on reinsurer performance. Effective December 31, 2020, UIHC arranged 69.5% quota-share reinsurance for specified Northeast personal homeowners business through May 31, 2021. In January 2021, it completed a sale of renewal rights for that business, subject to regulatory approval of policy transfers; consideration included 100,000 HCI Group shares and potential commissions capped at $3.1 million.
Debt and covenant risks warrant attention. Financial leverage was 29% against a 30% limit under the senior-note terms. UIHC disclosed that it was not in compliance with the Truist term note’s minimum cash-flow coverage covenant at year-end and obtained a waiver for the period. Senior notes carry a 6.25% coupon and mature in 2027. Insurance-subsidiary dividends are restricted by regulation, constraining holding-company liquidity.
Other notable items include a $12.6 million tax benefit from CARES Act net-operating-loss carryback provisions; a $2.8 million noncash write-off after discontinuing plans for a new headquarters; and continued low interest-rate pressure on investment income. The company reported no material COVID-19 claims or operational disruption in 2020, but identified future pandemic effects as uncertain. Major risks include catastrophe severity and frequency, Florida concentration, claims-reserve estimation, reinsurance cost and collectability, litigation and assignment-of-benefits exposure, ratings, and agency concentration. All insurance subsidiaries exceeded minimum RBC requirements; reported ratios ranged from 302% to 2,189%. Deloitte issued unqualified opinions on the financial statements and internal control. Loss reserves were identified as a critical audit matter.
Most important facts for investors to verify
- Whether catastrophe activity, reserve development, and claims-payment trends support the recorded $1.09 billion gross loss reserve and expected reinsurance recoveries.
- How the 2021 reinsurance renewals affect retained catastrophe risk, ceding costs, coverage limits, and recoverability from reinsurers.
- Whether the Truist covenant waiver was extended or the coverage covenant restored, and how leverage compares with the senior-note limit.
- Whether underwriting changes and rate increases improve underlying results without materially weakening retention, premium growth, or insurance ratings.
- Regulatory approval and final economics of the Northeast renewal-rights transfer, including policy migration and any commissions earned.
- The quality and repeatability of investment gains, the effect of lower yields, and the implications of negative operating cash flow and reduced book value.
- Holding-company liquidity, subsidiary dividend capacity, and the board’s ability to sustain the $0.06 quarterly dividend amid losses and regulatory capital needs.