Business context and reporting period
United Insurance Holdings Corp. (UPC Insurance) filed this unaudited Form 10-Q for the three months ended March 31, 2017. It is a property and casualty insurer focused primarily on homeowners’ coverage, operating across multiple U.S. states. The filing’s company name is United Insurance Holdings Corp.; American Coastal Insurance Company (ACIC) is discussed as a subsequent acquisition.
Financial performance and position
Amounts below are in millions of dollars unless noted otherwise.
- Revenue and premiums: Total revenue was $122.6 million, up 14.0% from $107.6 million. Gross premiums written rose 24.2% to $168.8 million; net premiums earned increased 5.7% to $107.2 million. Other revenue increased to $12.9 million from $3.5 million.
- Profit: Net income was $3.9 million, up 32.1% from $3.0 million. Diluted EPS was $0.18 versus $0.14. Total comprehensive income was $6.4 million versus $6.7 million.
- Underwriting and margins: Net loss ratio improved to 59.1% from 63.4%, but the expense ratio rose to 49.1% from 38.4%. The combined ratio increased to 108.2% from 101.8%, indicating underwriting losses on the reported measure. The company’s non-GAAP underlying combined ratio was 90.9%, versus 83.8%. Current-quarter catastrophe losses affected the combined ratio by 9.9 points, compared with 14.9 points; favorable prior-year reserve development contributed 0.5 points of improvement, versus 3.1 points of deterioration in 2016.
- Cash flow: Operating activities used $4.9 million, compared with providing $40.9 million in the prior-year quarter. Investing activities used $10.0 million; financing activities used $11.6 million. Cash and cash equivalents fell to $124.2 million from $150.7 million at year-end.
- Liquidity and assets: Cash, cash equivalents and investments totaled $665.3 million, down from $679.3 million at December 31, 2016. Total assets were $950.9 million; stockholders’ equity was $247.1 million. Book value per share was $11.37, compared with $11.35.
- Debt: Notes payable totaled $53.8 million, slightly below $54.2 million at year-end. Interest expense rose to $0.8 million from $0.1 million, primarily reflecting the company’s newer borrowing. The company reported compliance with its debt covenants.
- Dividends: The company declared $0.06 per share for the quarter, versus $0.05 in 2016. A further $0.06 quarterly dividend was declared May 9, payable May 30, 2017.
Material changes versus the prior comparable period
- Premium growth was strongest in the Northeast and Gulf regions; policies in force increased to 461,708 from 364,742.
- Net income grew, but expense growth outpaced net earned premium growth. Policy acquisition costs increased 31.1%, operating expenses 48.5%, and general and administrative expenses 42.9%.
- Ceded premiums earned increased to $74.9 million from $45.1 million, reflecting the reinsurance program. The company reported $8.4 million of quota-share ceding commission income; its reported underlying combined ratio excludes this item.
- Investment income increased to $3.0 million from $2.4 million, while net realized investment losses were $0.4 million versus gains of $0.3 million.
- Cash from operations shifted from a substantial inflow to an outflow, mainly because of higher reinsurance and claims payments, partly offset by increased premium collections.
- Trailing-twelve-month return on average equity was 2.7%, compared with 13.0% a year earlier.
Outlook, risks, contingencies and unusual items
- Management expects gross written premium growth to continue through expansion in existing markets and entry into other states where the company is licensed; no quantified earnings or revenue guidance is provided.
- The 2016–17 catastrophe reinsurance program provided stated protection of approximately $1.515 billion excess of $10 million. Its estimated cost was $191.5 million. Reinsurance reduces catastrophe exposure, but the company remains liable to policyholders if reinsurers fail to pay.
- Management reported $10.6 million of current-period catastrophe losses, net of reinsurance. It also reported $0.5 million of favorable prior-year loss development; reserve estimates remain judgmental and may change as claims develop.
- The April 3, 2017 ACIC merger closed after the reporting period. The company issued 20,956,355 common shares as consideration. Unaudited pro forma first-quarter results, as if the merger had occurred January 1, 2017, were revenue of $160.7 million and net income of $10.4 million; these figures are not reported actual results for the quarter.
- Key risks include catastrophe and severe-weather exposure, reinsurance cost and availability, investment and interest-rate risk, regulation, competition, litigation, and the ability to maintain financial-strength ratings. Management said it had no material non-claims-related legal actions and no material market-risk changes from its 2016 Form 10-K. It reported no off-balance-sheet arrangements and no material assessments against its insurance affiliates.
Important facts for investors to verify
- How much of premium growth and the increase in other revenue is recurring, and how much reflects reinsurance-related items or business mix?
- Whether expense growth moderates and underwriting performance improves, particularly given the 108.2% combined ratio and deterioration in the underlying combined ratio.
- Whether operating cash flow recovers after the quarter’s reinsurance, claims and other payment outflows.
- The adequacy of loss reserves and the collectability and credit quality of reinsurance recoverables.
- The financial and dilution effects of the post-quarter ACIC merger, including the issued shares and the difference between the reported and pro forma results.
- Continued compliance with debt covenants, regulatory capital requirements and restrictions on dividends from insurance subsidiaries.