United Insurance Holdings Corp. (UPC Insurance) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing identifies the registrant as United Insurance Holdings Corp.; this differs from the company name in the request metadata. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
UPC is a property and casualty insurance holding company primarily writing homeowners’ insurance across multiple U.S. states, with significant catastrophe exposure. It acquired Family Security Holdings and subsidiaries (FSH) on February 3, 2015; FSH results are included from that date. The company reports one business segment.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Gross premiums written | $156.0 | $105.1 | $425.2 | $323.0 |
| Net premiums earned | $84.0 | $65.1 | $242.5 | $193.3 |
| Total revenue | $89.8 | $68.8 | $257.5 | $204.1 |
| Net income | $8.1 | $8.6 | $13.6 | $29.6 |
| Diluted EPS | $0.38 | $0.41 | $0.63 | $1.50 |
| Net combined ratio | 91.5% | 84.8% | 97.4% | 81.3% |
| Underlying net combined ratio | 88.3% | 86.1% | 87.4% | 82.2% |
At September 30, cash and cash equivalents were $84.3 million and investments were $445.7 million, totaling $530.1 million, up from $443.0 million at year-end 2014. Total assets were $780.7 million, total liabilities $553.5 million, and stockholders’ equity $227.2 million. Notes payable were $12.6 million, down from $13.5 million. Operating cash flow for the nine months was $83.2 million, investing cash flow was negative $53.7 million, and financing cash flow was negative $6.5 million; cash increased $23.0 million to $84.3 million.
Book value per share was $10.55, up 8.2% from $9.75 at December 31, 2014. The board declared a $0.05-per-share quarterly dividend in November, payable November 27, 2015. The company reported no off-balance-sheet arrangements.
Changes versus comparable periods
- Q3 gross written premiums increased 48.5% and revenue increased 30.4%; nine-month gross written premiums rose 31.6% and revenue rose 26.2%. Growth was strongest outside Florida, with FSH contributing to Louisiana growth. Policies in force increased 37.2% year over year to 307,748.
- Net income fell 6.4% in Q3 and 54.2% for the nine months. Nine-month catastrophe losses were $25.6 million versus $1.0 million in the prior-year period; higher expenses also weighed on results.
- The net combined ratio worsened 6.7 percentage points in Q3 and 16.1 points year to date. The underlying ratio also deteriorated, by 2.2 and 5.2 points, respectively. Favorable prior-year reserve development was $1.1 million in Q3 and $1.4 million year to date.
- Investment income increased to $6.7 million for nine months from $4.9 million; net realized investment gains were $0.3 million, versus a $0.02 million loss.
Outlook, risks, and unusual items
- Management expected gross written premium growth to continue through growth in existing states and expansion into states where UPC is licensed. The filing provides no quantified earnings or EPS guidance.
- The 2015–16 catastrophe reinsurance program provides up to $1.243 billion of protection above specified retentions; its estimated cost is $161.4 million. Reinsurance does not eliminate exposure if counterparties cannot meet obligations, and catastrophe severity, weather, reinsurance cost and availability, and regulatory requirements remain important risks.
- On September 26, 2015, UPC agreed to acquire Interboro Insurance Company for $57.0 million, subject to a purchase-price adjustment based on closing GAAP net book value. Consideration is $48.5 million cash and an $8.5 million note due in 18 months at 6% annual interest. The agreement is a pending transaction in this filing.
- Q3 general and administrative expense included approximately $1.1 million in non-recurring legal fees; nine-month expense included approximately $2.1 million of non-recurring legal and professional services. The company is involved in ordinary-course claims-related litigation and records reserves when loss is probable and estimable.
- UPC Re reported negative statutory surplus of $1.4 million at September 30, which management attributed to Q3 dividends and said would be corrected before year-end. The company said regulated affiliates met applicable requirements, and it was in compliance with its SBA note covenants. Insurer dividend capacity and capital are subject to regulatory restrictions.
- Management said current capital resources and operating cash flow should meet anticipated working-capital needs, while cautioning this is not assured. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether the Interboro acquisition closed, its final purchase-price adjustment, and the resulting cash, debt, and capital impact.
- Whether UPC Re’s statutory surplus was restored by year-end and whether insurer capital or dividend restrictions changed.
- Subsequent catastrophe losses, reinsurance recoveries and counterparty collectability, and the ultimate cost of the 2015–16 reinsurance program.
- Loss-reserve development and whether underlying combined-ratio trends improve as the business grows outside Florida.
- How much premium and earnings growth came from FSH versus organic expansion, and the continuing effect of higher acquisition, operating, legal, and professional costs.