United Insurance Holdings Corp. — Q2 2017 Form 10-Q
Entity note: The filing is for United Insurance Holdings Corp. (UPC Insurance), the parent company of American Coastal Insurance Company (ACIC), not a standalone ACIC filing. Reporting period ended June 30, 2017; financial statement amounts are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
The company writes residential and commercial property and casualty insurance across multiple U.S. states. It completed its acquisition of AmCo, including ACIC, on April 3, 2017, issuing 20.96 million shares as consideration. AmCo’s results are included only from that date, limiting comparability with 2016. Management cited the acquisition and organic growth as drivers of premium growth.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross premiums written | $352.3 | $210.8 | $521.2 | $346.7 |
| Net premiums earned | $159.6 | $114.2 | $266.8 | $215.5 |
| Total revenue | $178.1 | $120.9 | $300.7 | $228.5 |
| Net income | $7.3 | $9.8 | $11.2 | $12.8 |
| Diluted EPS | $0.17 | $0.45 | $0.35 | $0.59 |
| Operating cash flow | — | $58.4 | $52.5 |
- Gross premiums written rose 67% for Q2 and 50% for the first half, reflecting AmCo, organic growth, and increased commercial property premiums.
- Net income fell 26% in Q2 and 13% for the first half. Management attributed the declines mainly to higher catastrophe losses; merger-related costs and amortization also weighed on reported results.
- Reported combined ratio was 103.2% in Q2 (92.5% prior year) and 105.2% for the first half (96.9%). The underlying combined ratio, a company-defined non-GAAP measure excluding catastrophe losses, prior-year development and ceding commissions, was 83.7% and 86.3%, respectively.
- Net catastrophe losses were $21.8 million in Q2 and $32.4 million for the first half, versus $3.7 million and $18.8 million in the comparable 2016 periods. Prior-year reserve development was favorable by $1.3 million in Q2 and $1.8 million for the first half.
- At June 30, cash and cash equivalents were $254.2 million; investments were $783.5 million, for combined cash and investments of $1.038 billion. Operating activities generated $58.4 million in the first half. Total cash increased $103.5 million, including $95.3 million of cash acquired with AmCo.
- Total liabilities were $1.292 billion, stockholders’ equity was $529.5 million, and notes payable were $53.8 million at June 30. The company reported compliance with debt covenants. Insurer dividend capacity is subject to regulatory restrictions.
Material changes and unusual items
- AmCo acquisition increased scale and added a commercial property business; the preliminary purchase price allocation included $46.1 million of goodwill and $30.3 million of intangible assets. Purchase accounting remained subject to finalization.
- Outstanding common shares increased substantially following the issuance of 20.96 million shares for the acquisition. The company reported 42.74 million shares outstanding as of August 9, 2017.
- General and administrative expenses rose to $28.2 million in Q2 from $11.5 million, with management citing merger expenses and acquired-intangible amortization. First-half expenses were $39.5 million versus $19.4 million.
- First-half net realized investment losses were $0.5 million, compared with gains of $0.4 million in 2016. No investment impairment charges were recorded.
Outlook, risks and contingencies
- Management expected premium growth to continue through expansion in existing markets and entry into additional licensed states; no quantified earnings or premium guidance was provided.
- The 2017–18 catastrophe reinsurance program, effective June 1, provides aggregate coverage up to a stated exhaustion point of $2.748 billion. Group retention is $55 million for a first event and $30 million for subsequent events; estimated program cost is $314.2 million. The company said the program provides protection for modeled severe events, but actual losses and recoveries remain uncertain.
- Reinsurance credit risk remains: the company is primarily liable to policyholders if reinsurers fail to perform. Seventy percent of open-market catastrophe limit was described as fully collateralized.
- Loss reserves require significant estimates. The filing notes that the company had a reserve deficiency during 2016, while first-half 2017 development was favorable; actual ultimate claims may differ from estimates.
- Other material risks include catastrophe and severe-weather exposure, reinsurance availability and cost, insurance regulation and statutory capital requirements, investment-market and interest-rate risk, competition, acquisition integration, and litigation. Management reported no material non-claims-related legal actions and no litigation expected to materially harm consolidated results or financial position.
- The board declared a $0.06 per-share quarterly dividend on August 7, payable August 28, 2017. Management stated that current capital resources and operating cash were sufficient for anticipated working-capital needs.
Important facts for investors to verify
- How AmCo/ACIC integration, purchase accounting, and the much larger share count affect comparable earnings and per-share value.
- Whether catastrophe reinsurance limits, retentions, costs, collateralization, and reinsurer credit quality remain adequate through the hurricane season.
- Whether favorable reserve development persists and whether the 2016 reserve deficiency or new catastrophe claims require further strengthening.
- How much reported expense growth reflects recurring operating costs versus merger expenses and intangible amortization, and whether underlying performance measures reconcile to GAAP results as presented.
- Insurer statutory surplus, regulatory dividend constraints, debt covenant compliance, and the sensitivity of investment values to interest-rate or credit changes.
- Related-party arrangements, including business handled by AmRisc, in which a company director held an ownership interest and served as CEO.