ACIC

Business Context and Reporting Period

Company: United Insurance Holdings Corp. (UIHC), formerly FMG Acquisition Corp.
Reporting Period: Quarterly period ended March 31, 2009 (Form 10-Q).
Business Overview: UIHC is a property and casualty insurance holding company operating exclusively in Florida. Its primary subsidiary, United Property & Casualty Insurance Company (UPCIC), underwrites homeowner and dwelling policies, flood insurance (via NFIP), and a commercial auto "Garage" line. The company utilizes an independent agency network and assumes policies from Citizens Property Insurance Corporation.

Key Financial Metrics

Note: Debt consists of $4.9 million current and $36.5 million long-term notes payable.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 16.9% to $22.0 million. This was primarily driven by the absence of a $2.9 million policy assumption bonus received in Q1 2008 and a $2.7 million increase in net realized investment losses.
• Investment Losses: Net realized investment losses surged to $2.7 million (vs. $0.2 million in 2008) due to a $1.9 million other-than-temporary impairment (OTTI) charge on equity securities.
• Premium Growth: Gross premiums written increased 27.3% to $37.0 million, driven by a 37% increase in homeowner policies-in-force (85,900 vs. 62,600) and new policies assumed from Citizens.
• Expense Increases: Policy acquisition costs rose 16.7% and salaries/wages increased 59% due to personnel additions and bonuses. However, general and administrative expenses decreased 24.2% as one-time merger-related costs from 2008 were not repeated.
• Tax Rate Impact: The effective tax rate increased to 37.5% (from 19.1% in 2008) because all subsidiaries were consolidated for tax purposes in 2009, whereas only one subsidiary paid taxes in 2008.

Outlook, Risks, and Unusual Items

• Discontinued Operations: The company decided to discontinue its "Garage" commercial auto product line. Renewal rights were granted to another insurer effective April 1, 2009, for a one-year period.
• Regulatory Risks: The company is subject to Florida-specific regulations, including mandatory assessments from the Florida Hurricane Catastrophe Fund (FHCF) and Citizens Property Insurance Corporation. No new assessments were levied in Q1 2009.
• Catastrophe Exposure: As a Florida-only insurer, the company faces significant risk from hurricanes and severe weather. No catastrophes occurred in Q1 2009. The company retains the first $15.5 million of hurricane losses and $25.5 million of non-hurricane losses per event.
• Liquidity and Covenants: The company maintains strong liquidity with $47.2 million in cash. It is in compliance with debt covenants, which include a minimum consolidated net worth of $45 million and a debt cap of $58.3 million (excluding a $20 million state note).
• Contingent Consideration: A merger agreement provides for potential additional payments of up to $5 million to former members if net income exceeds $25 million in specific measurement periods.

Investor Verification Checklist

• Investment Portfolio Quality: Verify the composition of the equity portfolio and the rationale for the $1.9 million OTTI charge to assess future impairment risks.
• Loss Reserve Adequacy: Review the actuarial assumptions for unpaid losses and loss adjustment expenses (LAE), particularly given the 37% increase in policies-in-force.
• Reinsurance Counterparty Risk: Confirm the financial strength of reinsurers and the status of letters of credit for non-approved reinsurers.
• Regulatory Compliance: Monitor Florida Office of Insurance Regulation (OIR) assessments and potential changes to wind mitigation credit requirements.
• Debt Maturity Profile: Note that the $20 million State Board of Administration note principal payments are deferred until October 2009, subject to OIR approval.