United Insurance Holdings Corp. — FY 2012 Form 10-K
Entity and period: The filing is for United Insurance Holdings Corp. (trading as UIHC), for the fiscal year ended December 31, 2012—not a quarterly report. This differs from the requested company name, American Coastal Insurance Corp.; American Coastal appears only in the filing’s Florida market comparison. Confirm the intended issuer before relying on this summary. Unless noted otherwise, financial amounts below are in millions of dollars.
Business context
UIHC is a property-and-casualty insurance holding company whose business is principally homeowners insurance, written through subsidiaries and more than 2,000 agents. It operated in Florida, South Carolina, Massachusetts and Rhode Island, and was licensed—but had not yet started writing policies—in North Carolina. Florida accounted for approximately 90% of premiums. Homeowners policies generated 95% of 2012 written premium; flood policies were ceded to the federal program, with UIHC earning commissions but retaining no underwriting risk.
Financial performance and condition
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $131.234 | $96.418 |
| Gross premiums written | $254.909 | $203.806 |
| Net premiums earned | $121.968 | $90.080 |
| Net income | $9.705 | $8.088 |
| Diluted earnings per share | $0.91 | $0.77 |
| Net loss ratio | 47.9% | 43.1% |
| Expense ratio | 46.9% | 48.6% |
| Combined ratio | 94.8% | 91.7% |
| Operating cash flow | $34.312 | $38.649 |
Revenue rose 36%, gross written premiums rose 25%, and policies in force increased 33% to 135,300. Net income increased 20%; calculated net margin on total revenue was approximately 7.4%, versus 8.4% in 2011. Return on average equity was 16.1% in both years, and book value per diluted share increased to $5.70 from $5.31.
At year-end, cash and cash equivalents were $71.205 and investments were $152.180, totaling $223.385. Total assets were $313.614, liabilities $225.628, and stockholders’ equity $87.986. Notes payable were $15.882, down from $17.059; the Florida State Board of Administration note bore a 1.66% rate and was current on covenants. Cash from operations was positive but lower than 2011; investing activities used $25.894 and financing activities provided $21.148, principally reflecting the public stock offering.
Insurance-subsidiary statutory surplus was $68.007 and its risk-based capital ratio was 471%. Management said premium-to-surplus and other applicable requirements were met. The insurer’s ability to distribute cash to the holding company is subject to regulatory restrictions.
Material changes and unusual items
- Loss and loss-adjustment expenses increased to $58.409 from $38.861. Current-year catastrophe losses were $3.470, compared with $0.792, including losses from Tropical Storms Debby and Isaac and Superstorm Sandy.
- Prior-year reserve development was unfavorable by $0.670 in 2012, versus favorable development of $4.158 in 2011. Gross unpaid losses and LAE were $35.692 at year-end; the net reserve was $33.757.
- The combined ratio worsened by 3.1 percentage points, while management’s non-GAAP underlying combined ratio improved to 90.0% from 95.6%. The company attributes the difference partly to catastrophe losses, reserve development and a Florida Insurance Guaranty Association (FIGA) assessment.
- A $1.646 FIGA assessment was expensed in the fourth quarter. UIHC expects to recover it through policy surcharges over a 12-month period beginning February 2013; timing differences may affect reported results.
- Investment income rose to $3.083 from $2.823; net realized investment gains rose to $2.160 from $0.158. The company sold $21.659 of fixed maturities in the fourth quarter as part of a portfolio shift toward shorter duration.
- In December, UIHC issued 5.0 million shares and received $23.947 in net proceeds. A January 2013 over-allotment added $3.631. The company paid a $0.03-per-share fourth-quarter dividend and stated an intention to maintain a regular quarterly dividend, subject to board discretion and regulatory limits.
Outlook, risks and contingencies
Management expected premium growth to continue through expansion in existing states, launching in North Carolina and pursuing additional state licenses. The insurer implemented an average 9.5% rate increase on new and renewal Florida homeowners business on February 1, 2013. In January 2013, it also assumed 15,133 Citizens policies, with approximately $27.348 of in-force premium; recorded assumed written premium was approximately $16.136 and could change with opt-outs, endorsements and cancellations.
The 2012 catastrophe reinsurance program included Florida Hurricane Catastrophe Fund and private coverage. The filing describes an estimated FHCF limit of $353.101 above a $153.332 retention, subject to adjustment, plus private layers. Reinsurance reduces exposure but does not release UIHC from its direct obligations to policyholders; recovery depends on reinsurer performance and contract terms.
Key risks include severe weather and catastrophe losses, Florida concentration, reserve-estimation uncertainty, reinsurance cost and availability, reinsurer credit risk, rate and underwriting regulation, competition, investment-market fluctuations, agent relationships, and reliance on third-party technology and service providers. The company disclosed ordinary-course claims litigation but no non-claims-related legal actions at year-end. It accrued $0.480 for remaining salary and benefits under a former CEO’s consulting arrangement after he could no longer provide services. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor did not audit internal-control effectiveness.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is UIHC’s 10-K, not an American Coastal Insurance Corp. filing.
- Assess reserve adequacy, especially the recent unfavorable development, catastrophe claims and the sensitivity of estimates to new claims information.
- Review the 2013 reinsurance terms, adjusted retentions and limits, renewal pricing, and reinsurer credit and collateral.
- Track geographic diversification and whether Florida concentration, rate approvals and the Citizens assumption program support profitable growth.
- Verify actual FIGA surcharge collections, capital available for holding-company needs, debt-covenant headroom and the sustainability of dividends.
- Distinguish reported combined-ratio results from management’s non-GAAP underlying ratio and consider the impact of catastrophe losses and reserve changes.