United Insurance Holdings Corp. (UIHC) — Q2 2019 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2019; comparisons are with Q2 and the first six months of 2018. The filing is by United Insurance Holdings Corp., the parent of United Property & Casualty Insurance and American Coastal Insurance Company (ACIC). It writes residential personal and commercial property insurance across 12 states, with significant Florida exposure. Amounts below are in millions unless stated otherwise.
Key financial metrics
- Q2 revenue: Total revenue was $204.8 million, up from $183.1 million. Net premiums earned were $190.4 million, up 11.2%; gross premiums written grew 16.9% to $449.8 million.
- Q2 earnings: Net loss attributable to UIHC was $2.9 million, versus net income of $14.7 million; diluted EPS was $(0.07), versus $0.34. Six-month net income attributable to UIHC was $6.6 million, down from $23.1 million; diluted EPS was $0.15, versus $0.54.
- Underwriting: Q2 combined ratio rose to 108.2% from 94.2%; the six-month ratio was 106.0% versus 95.0%. Q2 net loss ratio increased to 61.1% from 51.7%. The underlying combined ratio, a company-defined non-GAAP measure, was 91.8% for Q2 and 93.0% for six months.
- Cash flow and liquidity: First-half operating cash flow was $167.1 million, versus $78.6 million; investing activities provided $5.7 million versus using $106.7 million. Cash, cash equivalents and restricted cash totaled $363.1 million, including $87.1 million restricted; investments were $975.4 million.
- Debt and equity: Balance-sheet notes payable, net, were $159.5 million. Disclosed gross long-term debt was $162.4 million, including $150 million of 6.25% senior notes. Total stockholders’ equity was $562.5 million. The company reported compliance with debt covenants.
- Investment income: Net investment income was $7.6 million in Q2 and $14.9 million for six months. Six-month equity-security unrealized gains were $12.9 million and contributed to reported results.
Changes versus the prior comparable period
- Premium growth did not translate into improved earnings: Q2 expenses rose 27.2% to $208.4 million, led by higher losses and policy acquisition costs. For six months, expenses increased 22.9% to $398.4 million.
- Q2 loss and loss adjustment expenses increased 31.2% to $116.3 million. The quarter included $15.8 million of catastrophe losses and $15.3 million of adverse prior-year reserve development; the comparable 2018 quarter had $17.3 million of catastrophe losses and $0.9 million of favorable development.
- For the first half, catastrophe losses were $27.5 million versus $23.7 million, while prior-year reserve development was $21.0 million adverse versus $1.6 million favorable. Management cited greater-than-expected losses as the driver of adverse development.
- Policies in force increased 10.4% year over year to 615,357. The 2019 quota-share treaty’s cession rate rose to 22.5% from 20.0% and added FSIC coverage; management said reinsurance costs also reflected lower gross earned premiums.
Outlook, risks and unusual items
- Management expects gross written premium growth through expansion in existing markets and entry into additional licensed states; the filing provides no quantified earnings or EPS guidance.
- The catastrophe program includes up to $3.2 billion of excess-of-loss protection for the 2019–2020 treaty year, alongside quota-share and aggregate protection. Reinsurance does not remove the company’s primary obligation to policyholders, and the company remains exposed if reinsurers fail to pay.
- Key risks include catastrophe and severe-weather concentration, reserve-estimation uncertainty, reinsurance availability and collectability, Florida regulatory and market conditions, investment-market risk, and debt service and covenant requirements.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because a previously disclosed material weakness in ongoing monitoring of internal controls remained unremediated. Management stated the financial statements fairly present results and described remediation work planned for 2019.
- After quarter-end, the board declared a $0.06-per-share dividend and authorized up to $25 million of share repurchases. The company also contributed $12 million to FSIC on July 31, 2019.
- No material non-claims-related legal actions or material changes in risk factors were reported. The filing noted no material market-risk changes during the first half.
Important facts for investors to verify
- Whether subsequent quarters show improvement in loss and combined ratios, particularly after adverse reserve development.
- How catastrophe losses, reinsurance recoverables and the cost of the renewed reinsurance program develop through the 2019 hurricane season.
- Whether the control weakness is remediated and controls operate effectively over a sufficient testing period.
- The availability of holding-company cash and regulatory limits on subsidiary dividends, alongside debt service and the planned repurchases and dividends.
- The effect of investment gains and losses on reported earnings, and the assumptions underlying loss reserves and reinsurance recoverables.