United Insurance Holdings Corp. (UPC Insurance) — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The filing identifies the registrant as United Insurance Holdings Corp., a property and casualty insurance holding company focused primarily on homeowners insurance. Amounts below are in thousands unless stated otherwise.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Gross premiums written | $135,956 | $106,616; up 27.5% |
| Net premiums earned | $101,370 | $78,048 |
| Total revenue | $107,561 | $82,396 |
| Net income | $2,951 | $198 |
| Diluted earnings per share | $0.14 | $0.01 |
| Operating cash flow | $40,860 | $18,783 |
| Cash and cash equivalents | $126,409 | $84,786 at December 31, 2015 |
| Total investments | $454,729 | $452,714 at December 31, 2015 |
| Notes payable | $12,059 | $12,353 at December 31, 2015 |
| Stockholders’ equity | $245,192 | $239,211 at December 31, 2015 |
Net loss ratio was 63.4%, expense ratio 38.4%, and combined ratio 101.8%, compared with 66.6%, 38.6%, and 105.2%, respectively, in Q1 2015. The underlying combined ratio, a company-defined non-GAAP measure excluding current-year catastrophe losses and prior-year reserve development, was 83.8% versus 84.4%. The combined ratio above 100% indicates underwriting expenses and losses exceeded net premiums earned under the company’s stated calculation.
Comprehensive income was $6,700, including $3,915 of after-tax unrealized investment gains. Book value per share was $11.35, up from $11.11 at year-end 2015. The quarterly dividend was $0.05 per share; the board subsequently declared a $0.06 dividend payable in May 2016.
Material changes and management commentary
- Premium growth was attributed primarily to organic growth in new and renewal business across Florida and other regions. Policies in force rose 35.0% year over year to 364,742.
- Net income increased by $2,753 from Q1 2015. Management attributed the improvement primarily to higher written premiums. Expenses also increased 25.6% to $103,252, led by losses and loss-adjustment expenses, policy acquisition costs, and operating costs.
- Current-period catastrophe losses were $15,056, with a 14.9 percentage-point impact on the combined ratio; the comparable impact was 19.6 points in Q1 2015. Prior-year reserve development was unfavorable by $3,186, versus $945 unfavorable a year earlier.
- Operating cash flow increased year over year, driven mainly by premium collections, partly offset by higher claims, reinsurance, and commission payments. Cash rose by $41,623 during the quarter.
- At March 31, the company had $581,138 of cash, cash equivalents, and investments. It reported no off-balance-sheet arrangements and stated it expected current capital resources and operating cash flow to meet anticipated working-capital requirements, while cautioning that this is not assured for the future.
Outlook, risks, and unusual items
- Management expected gross written premiums to continue growing through expansion in current states and entry into additional states where the company is licensed. The filing gives no quantified earnings or revenue guidance.
- The 2015–16 catastrophe reinsurance program provided stated protection of $1,243,122 in excess of $25,000,000, subject to program terms, limits, and exhaustion. The company also described additional aggregate protection effective January 1, 2016 for certain non-named-windstorm catastrophe losses.
- Insurance operations face catastrophe and severe-weather exposure, reinsurance cost and availability risk, regulatory requirements, competition, investment-market risk, rating risks, and claims litigation. Reinsurer inability to pay could leave the company liable for insured losses.
- The company reported compliance with its SBA note covenants and insurance regulatory requirements at March 31. However, the note’s writing-ratio covenants and regulatory approval requirements can affect borrowing costs, repayments, and subsidiary dividend capacity.
- On April 29, 2016, after quarter-end, the company acquired Interboro Insurance Company for $57,000: $48,500 in cash and an $8,500 seller note due in 18 months at 6%. The transaction added approximately $55,000 of homeowners’ gross written premiums in New York and South Carolina. Certain non-homeowners lines and specified liabilities were excluded or retained by the seller.
- Claims-related legal actions arise in the ordinary course; the filing does not provide a clear quantified estimate of potential exposure. A related-party law firm billed approximately $596 in Q1 2016, compared with $180 in Q1 2015.
Important facts for investors to verify
- Whether premium growth translates into sustained underwriting profitability, given the 101.8% combined ratio and the contribution of catastrophe losses and reserve development.
- The adequacy of unpaid loss and loss-adjustment reserves, and the assumptions used to estimate catastrophe and prior-year claims.
- The coverage, cost, counterparties, and remaining limits of reinsurance, including protection against multiple or severe events.
- The effect of the Interboro acquisition’s cash payment and seller note on liquidity, leverage, and future results; the acquired premiums are not a Q1 result.
- Subsidiary statutory capital, writing-ratio covenants, and restrictions on transfers or dividends to the holding company.
- Investment valuation and exposure to interest-rate, credit, equity-price, and liquidity risks, as well as the outcome of claims litigation and other contingencies.