Business context and reporting period
United Insurance Holdings Corp. (UPC Insurance) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It writes residential and commercial property and casualty insurance. The results include American Coastal Insurance Company (ACIC) following the April 3, 2017 acquisition of AmCo; the acquired operations are included from that date. Amounts below are in millions of dollars unless noted.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross premiums written | $267.2 | $194.3 | $788.4 | $541.1 |
| Net premiums earned | $152.5 | $120.2 | $419.3 | $335.8 |
| Total revenue | $171.1 | $127.2 | $471.8 | $355.7 |
| Net income (loss) | $(28.0) | $3.4 | $(16.9) | $16.2 |
| Diluted earnings per share | $(0.66) | $0.16 | $(0.47) | $0.75 |
| Combined ratio | 141.6% | 101.4% | 118.4% | 98.5% |
- Q3 net loss and loss adjustment expenses (LAE) were $143.1 million; the net loss ratio was 93.9%. Nine-month losses and LAE were $293.4 million; the net loss ratio was 70.0%.
- Operating cash flow was $84.3 million for the nine months, compared with $89.3 million a year earlier. Cash and cash equivalents were $280.3 million at September 30, 2017, versus $150.7 million at year-end 2016.
- Total assets were $2.183 billion and stockholders’ equity was $501.2 million. Notes payable were $53.1 million on the balance sheet; the debt note reports total debt carrying value of $53.6 million.
- Cash, cash equivalents and investments totaled $1.069 billion. The company declared dividends of $0.06 per share in Q3 and reported $0.18 per share for the first nine months.
Material changes versus prior comparable periods
- Gross written premiums rose 37.5% in Q3 and 45.7% for the nine months. Management attributed growth to the AmCo merger and organic growth, including commercial property premiums and business in the Gulf and Northeast regions.
- Net loss was primarily driven by catastrophe losses from Hurricanes Harvey and Irma. Q3 catastrophe losses were $82.6 million, versus $5.1 million in Q3 2016; nine-month catastrophe losses were $115.0 million, versus $23.9 million.
- Q3 combined ratio rose to 141.6% from 101.4%; nine-month ratio rose to 118.4% from 98.5%. The underlying combined ratio, a company-defined non-GAAP measure, was 81.5% in Q3 and 84.5% for nine months.
- The April AmCo transaction involved issuing 20.96 million shares, with a preliminary purchase price of $274.4 million. Goodwill increased to $59.7 million from $14.3 million at year-end, primarily reflecting the acquisition.
- Unpaid losses and LAE increased to $682.2 million from $140.9 million at year-end; reinsurance recoverable on paid and unpaid losses rose to $489.3 million from $24.0 million.
Outlook, risks and unusual items
- Management expected premium growth to continue through increased policies in current markets and expansion into states where the company is licensed. No quantified earnings or revenue guidance was provided.
- The 2017–18 catastrophe reinsurance program had a stated exhaustion point of $2.748 billion, including $1.928 billion of open-market catastrophe coverage and estimated $789 million of Florida Hurricane Catastrophe Fund coverage. Estimated program cost was $314.2 million. Management said reinsurance limited retained losses from Harvey and Irma to approximately $83 million after quota-share protection.
- Management expected significant near-term claim payments following the hurricanes, with reinsurance recoveries expected to largely offset the cash outflows. Recovery timing and reinsurer performance remain relevant liquidity risks.
- Loss reserves depend on estimates and actuarial judgments; actual claim costs may differ. The company reported $2.8 million of favorable prior-year reserve development for the nine months and stated it believed reserves were adequate.
- Insurance subsidiaries were reported in compliance with regulatory requirements and minimum capital and surplus requirements. Dividend capacity is subject to insurance regulation. The company also reported compliance with debt covenants and no material non-claims-related legal actions.
- The $8.55 million Interboro acquisition note matured and was paid in October 2017, with $0.77 million of accrued interest. A $0.06 per-share quarterly dividend was declared November 8, 2017.
Important facts for investors to verify
- How final catastrophe claim estimates and reinsurance recoveries develop, including the timing and collectability of recoverables.
- Whether the AmCo acquisition delivers expected growth and cost benefits, and how acquisition-related amortization, expenses and integration affect results.
- Reserve adequacy and subsequent development, particularly given the material increase in unpaid losses and LAE.
- Subsidiary statutory capital, regulatory dividend restrictions and the holding company’s access to cash.
- Debt covenant compliance and the distinction between balance-sheet notes payable and total debt in the debt note.