United Insurance Holdings Corp. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 8, 2012. The filing identifies the registrant as United Insurance Holdings Corp. (UIHC), a property and casualty insurance holding company focused on homeowners’ coverage. It writes business in Florida, South Carolina, Massachusetts and Rhode Island. Amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Gross premiums written | $77.9 | $65.3 | $135.9 | $116.1 |
| Net premiums earned | $29.7 | $22.3 | $57.5 | $41.4 |
| Total revenue | $31.6 | $24.0 | $61.1 | $44.5 |
| Income before taxes | $5.2 | $0.2 | $12.7 | $1.9 |
| Net income | $3.0 | $0.1 | $7.7 | $1.2 |
| Diluted earnings per share | $0.29 | $0.01 | $0.75 | $0.12 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $53.3 | $49.6 |
- Margins: Q2 loss and loss-adjustment expense ratio was approximately 43.6% of net premiums earned, versus 56.5% a year earlier; the six-month ratios were approximately 39.0% and 50.7%. Including policy acquisition, operating and general and administrative expenses, the corresponding combined ratios were approximately 87.1% versus 104.7% for Q2 and 83.2% versus 101.3% for the half-year. These are simple calculations from reported amounts.
- Balance sheet at June 30: Cash and cash equivalents were $92.1 million, investments $127.4 million, total assets $366.0 million, and stockholders’ equity $63.1 million. Notes payable were $16.5 million, down from $17.1 million at year-end 2011. Unpaid losses and loss-adjustment expenses were $33.2 million; unearned premiums were $130.9 million.
- Cash and liquidity: Cash rose from $41.6 million at year-end to $92.1 million. Six-month investing activities used $1.8 million and financing activities used $1.0 million. Management said current resources and operating cash flow should cover anticipated working-capital needs, while cautioning that future sufficiency is not assured.
Changes versus comparable periods
- Q2 gross premiums written rose 19.3%; six-month written premiums rose 17.1%. Management attributed growth to more policies and higher average premiums. Homeowners’ policyholders increased to approximately 114,800 from 101,800 at year-end 2011 and 94,100 a year earlier.
- Net premiums earned grew 33.3% in Q2 and 38.9% for the first half. Ceded premiums earned also increased, reflecting reinsurance costs and coverage.
- Net income improved to $3.0 million in Q2 from $89,000, and to $7.7 million for six months from $1.2 million. Management cited more favorable loss experience, partly offsetting higher claims associated with policy growth.
- At June 30, prepaid reinsurance premiums were $103.8 million versus $41.0 million at year-end, and reinsurance payable was $106.3 million versus $16.6 million, reflecting the placement of the 2012 catastrophe reinsurance program. Management noted cash from operations benefited from increased written premiums.
Outlook, risks and notable items
- No formal earnings or revenue guidance was provided. The company said it had applied to enter two additional states, aiming to reduce geographic concentration and catastrophe exposure. Rates are subject to regulatory review and approval.
- The 2012 catastrophe reinsurance program took effect June 1 for one year and includes Florida Hurricane Catastrophe Fund coverage and private layers. The filing describes substantial protection, but catastrophe exposure remains a central risk; FHCF limits and retention were subject to remeasurement based on exposure data.
- Key risks include severe weather and catastrophe losses, reserving estimates, reinsurance cost and availability, regulatory changes and assessments, competition and rate adequacy, investment-market risks, litigation, and possible financial-strength rating downgrades. Insurance subsidiary UPC reported statutory surplus of $48.1 million and stated it met regulatory requirements and SBA note covenants at June 30.
- UIHC recorded a $316,000 impairment in Q2 on a note receivable from Hamilton Risk Management (HRM), following HRM’s covenant breach. Subsequent to quarter-end, UIHC began settlement negotiations; it expected to settle the note and related partnership interest for $1.75 million. The outcome remained subject to settlement.
- The management services agreement with 1347 Advisors was terminated effective April 2, 2012, following a regulatory letter; several directors resigned around that time. John Forney was appointed CEO in June and received a $500,000 equity award vesting over five years, subject to continued employment.
- The board declared a $0.05-per-share cash dividend in March, paid in April. In July, it adopted a preferred-share purchase rights plan; rights were not immediately exercisable and were scheduled to expire in 2022 unless earlier redeemed or exchanged.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether premium growth and improved loss ratios persist, especially through catastrophe seasons and as the company expands geographically.
- The final terms and collectability of the proposed $1.75 million HRM settlement, including resolution of the breached covenant and partnership interest.
- Actual FHCF coverage limits, retention and reinsurance recoveries after exposure remeasurement, and the cost and adequacy of the program.
- UPC’s statutory capital, premium-to-surplus ratios, and ability to pay dividends or meet obligations under the surplus note; these are distinct from consolidated GAAP equity and liquidity.
- The significance and potential effects of the July rights plan, CEO transition, and termination of the 1347 Advisors agreement.