Business context and reporting period
United Insurance Holdings Corp. (branded UPC Insurance) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. It is a property and casualty insurance holding company focused primarily on homeowners insurance, operating in Florida and several other states. Amounts below are in thousands of dollars unless otherwise noted.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $67,507 | $44,170 in Q1 2013 |
| Net premiums earned | $64,034 | $42,297 in Q1 2013 |
| Net income | $11,389 | $4,351 in Q1 2013 |
| Diluted EPS | $0.65 | $0.27 in Q1 2013 |
| Net loss ratio | 43.2% | 48.6% in Q1 2013 |
| Expense ratio | 34.4% | 38.9% in Q1 2013 |
| Combined ratio | 77.6% | 87.5% in Q1 2013 |
| Operating cash flow | $17,134 | $32,193 in Q1 2013 |
| Cash and investments | $394,960 | $323,814 at December 31, 2013 |
| Total assets | $484,885 | $441,230 at December 31, 2013 |
| Total liabilities / notes payable | $311,231 / $14,412 | $333,643 / $14,706 at December 31, 2013 |
| Stockholders’ equity | $173,654 | $107,587 at December 31, 2013 |
Gross premiums written were $89,001 versus $87,746. Policies in force increased 31.5% year over year to 206,806. Book value per share was $8.33, up from $6.64 at year-end 2013; the company reported trailing-twelve-month return on average equity of 25.0%, versus 13.7% for the year-earlier period. The declared quarterly dividend rose to $0.04 per share from $0.03.
Material changes and management commentary
- Revenue rose 53%, primarily as net premiums earned increased 51%, reflecting business growth and the change in gross unearned premiums. Direct written premiums grew 23%; overall gross written premiums grew only modestly because assumed premiums declined, including returned Citizens policies.
- Management attributed stronger reported underwriting results to premium growth and a lower ceded-reinsurance premium percentage. The combined ratio improved by 9.9 percentage points, and there were no current-quarter catastrophe losses compared with $1,818 of catastrophe losses in Q1 2013.
- Underlying losses increased: the underlying net loss ratio rose to 43.4% from 40.3%. Management cited increased frequency and severity of water-related losses in Florida and water- and freeze-related losses in Massachusetts and Rhode Island.
- Operating cash flow declined by $15,059 year over year, reflecting lower assumed premiums, higher claim and operating expense payments, partly offset by increased premium collections and lower reinsurance payments. Financing cash flow included $54,046 net proceeds from a March public offering of 4.6 million shares.
- Investments increased materially, including a new $54,197 mutual fund holding investing primarily in structured and corporate bonds. Total cash and investments rose to $394,960.
Outlook, risks and contingencies
- No quantified earnings or financial guidance was provided. Management expected gross written premium growth to continue through increased policies in existing markets and expansion into additional states. Louisiana issued the insurance affiliate a certificate of authority on April 29, 2014.
- Management expected low interest rates to keep reinvestment yields below the portfolio’s current income yield for a period and anticipated continued capital-market volatility. A hypothetical 100-basis-point increase in rates would reduce fixed-maturity fair value by 3.03%, according to the filing’s sensitivity analysis.
- Catastrophe exposure is managed through pricing, geographic concentration controls and reinsurance. The 2013–2014 program included $441,540 of Florida Hurricane Catastrophe Fund coverage and $360,060 of private reinsurance coverage; actual exposure and recoveries remain subject to program terms and loss experience.
- The $14,412 SBA surplus note carries covenants tied to premium-to-surplus ratios; the company reported compliance at quarter-end. Insurance-company dividends and surplus-note payments are subject to regulatory restrictions. Statutory policyholder surplus was $85,927, and the affiliate met applicable regulatory requirements.
- The company reported ordinary-course claims-related legal actions and no material change to the risk factors in its 2013 Form 10-K. Management said current capital resources and operating cash should meet anticipated working-capital needs, while cautioning this is not assured for the future.
Important facts for investors to verify
- Whether premium growth and new-state expansion persist, and how much reported earned-premium growth reflects unearned-premium timing versus underlying production.
- Whether water-related claim frequency and severity continue to pressure underlying loss ratios and reserves.
- The adequacy, cost, terms and collectability of catastrophe reinsurance, including final Florida Hurricane Catastrophe Fund limits and retentions.
- The quality, liquidity and risk profile of the new mutual fund exposure and the investment portfolio’s sensitivity to interest rates and credit markets.
- Insurance-subsidiary statutory capital, dividend capacity, and continued compliance with the SBA note covenants.
- The use of proceeds from the equity offering, subsequent share dilution, and sustainability of the increased dividend.