Business Context and Reporting Period
Company: United Insurance Holdings Corp. (formerly FMG Acquisition Corp.)
Reporting Period: Quarterly period ended June 30, 2009 (Form 10-Q)
Business Overview: The company operates as a property and casualty insurer in Florida through its subsidiary, United Property & Casualty Insurance Company (UPCIC). It primarily underwrites homeowner and dwelling policies, supplemented by policies assumed from Citizens Property Insurance Corporation. The company also writes flood insurance under the National Flood Insurance Program (NFIP) and is phasing out its commercial "Garage" line of business.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Gross Premiums Written | $95,178 | $70,608 |
| Net Premiums Earned | $43,437 | $40,285 |
| Total Revenue | $48,304 | $51,390 |
| Net Income | $5,972 | $17,692 |
| Earnings Per Share (Basic) | $0.57 | $1.68 |
| Cash and Cash Equivalents (as of June 30, 2009) |
$100,908 | $31,689 (Dec 31, 2008) |
| Total Assets (as of June 30, 2009) |
$333,442 | $233,121 (Dec 31, 2008) |
| Total Liabilities (as of June 30, 2009) |
$283,472 | $190,194 (Dec 31, 2008) |
| Stockholders' Equity (as of June 30, 2009) |
$49,970 | $42,927 (Dec 31, 2008) |
Loss and Loss Adjustment Expenses (LAE): $18,739 (Six months 2009) vs. $12,474 (Six months 2008).
Investment Portfolio: Total investments of $95,257 at June 30, 2009, consisting primarily of fixed maturities and equity securities. The portfolio recorded a net unrealized gain of $0.1 million at period end, reversing a net unrealized loss of $2.4 million at year-end 2008.
Material Changes vs. Prior Period
- Revenue Growth: Gross premiums written increased 35% year-over-year to $95.2 million, driven by a 44% increase in homeowner policies-in-force (96,500 vs. 66,900) and higher renewal retention rates (91% vs. 80%).
- Profitability Decline: Net income decreased significantly to $6.0 million from $17.7 million in the prior year. This was primarily due to the absence of a $4.3 million policy assumption bonus received in 2008 and a $1.9 million other-than-temporary impairment (OTTI) charge on equity securities in 2009.
- Expense Increases: Loss and LAE expenses rose 50% to $18.7 million, attributed to higher claims paid (including non-routine fire losses and roof damage from thunderstorms) and increased case reserves due to higher exposure. Policy acquisition costs increased 22% to $10.5 million.
- Reinsurance Costs: Gross premiums ceded increased 64% to $88.0 million. This was largely driven by a $33.8 million increase in catastrophe reinsurance premiums for the 2009-2010 policy year, reflecting higher total insured values and increased rates.
- Tax Rate Change: The effective tax rate increased from 19.0% in 2008 to 38.0% in 2009. This reflects the consolidation of all subsidiaries into a single C-corporation tax return starting October 1, 2008, whereas in 2008 only one subsidiary was taxed as a corporation.
Guidance, Outlook, and Risks
Management Commentary: Management anticipates slower growth in the remainder of 2009 compared to the first half due to exposure management processes. Rate increases of 12.7% for the "Protector" homeowner program and 15% for the "Guardian" dwelling program were approved by the Florida Office of Insurance Regulation (OIR) and are effective in late 2009.
Reinsurance Outlook: The company entered into new catastrophe reinsurance contracts effective June 1, 2009, with a total premium of $83.6 million. Coverage includes layers with the Florida Hurricane Catastrophe Fund (FHCF) and private reinsurers. The company retains the first $16.4 million of hurricane losses and $26.4 million of non-hurricane losses before reinsurance coverage attaches.
Risks and Contingencies:
- Catastrophe Risk: As a Florida-only insurer, the company is highly exposed to hurricanes and severe weather. While reinsurance covers estimated 100-year probable maximum losses, a severe event could exceed coverage limits.
- Regulatory Risk: The company is subject to Florida regulations regarding premium rates, policy cancellations, and mandatory assessments from Citizens, FHCF, and the Florida Insurance Guaranty Association (FIGA). No new assessments were levied in the first half of 2009.
- Investment Risk: The company recorded a $1.9 million OTTI charge on equity securities. Future macroeconomic conditions could lead to additional impairment charges.
- Liquidity and Debt Covenants: The company maintains $100.9 million in cash. It is subject to debt covenants requiring a minimum consolidated net worth of $45 million and limiting aggregate debt to $58.3 million (excluding the SBA note). The company was in compliance as of June 30, 2009.
Investor Verification Checklist
- Reinsurance Adequacy: Verify the sufficiency of the $83.6 million reinsurance program against current Florida hurricane risk models and the company's specific exposure concentration.
- Loss Reserve Adequacy: Review the actuarial assumptions for Loss and LAE reserves, particularly given the 50% increase in expenses and the impact of recent non-catastrophic weather events (thunderstorms/fire).
- Investment Portfolio Quality: Assess the remaining equity securities for potential further other-than-temporary impairments (OTTI) given the $1.9 million charge already taken.
- Regulatory Assessments: Monitor for potential future assessments from FHCF or Citizens, which could materially impact profitability.
- Debt Covenant Compliance: Confirm ongoing compliance with the $45 million net worth covenant, especially if future dividends or losses occur.
- Rate Increase Impact: Evaluate the effectiveness of the approved 12.7% and 15% rate increases in offsetting rising acquisition costs and loss trends.