AMERICAN COASTAL INSURANCE Corp annual report, FY2016

Business context and reporting period

Filing identity: The supplied filing is United Insurance Holdings Corp. (UIHC), not a standalone 10-K for American Coastal Insurance Corp. UIHC’s proposed acquisition of AmCo Holding Company—which owns American Coastal—was pending at year-end 2016; stockholders approved the share issuance in February 2017. This summary therefore covers UIHC on a consolidated basis.

The 10-K reports the fiscal year ended December 31, 2016, with comparisons to 2015. UIHC is a property and casualty insurance holding company, principally writing homeowners coverage across 12 states. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless otherwise indicated.

Financial and operating performance

• Gross written premiums rose 24.3%, primarily from organic growth in the Gulf and Northeast regions. Policies in force increased to 451,155 from 347,015. Florida represented 41.5% of policies in force, down from 54.4%.
• The combined ratio deteriorated to 104.9% from 94.0%; above 100% indicates underwriting losses on the reported measure. The underlying combined ratio, a company-defined non-GAAP measure excluding current-year catastrophe losses and prior-year reserve development, increased to 89.0% from 86.2%.
• Net loss and loss adjustment expenses rose to $298.4 million from $183.1 million. Current-year catastrophe losses were $55.8 million, versus $28.6 million, and unfavorable prior-year reserve development was $17.0 million, versus favorable development of $2.4 million.
• The company reported $30.0 million of pre-tax net catastrophe losses from Hurricane Matthew and more than 5,000 related claims. The storm affected Florida, Georgia, South Carolina and North Carolina.
• Statutory surplus increased to $212.3 million from $150.9 million. Year-end risk-based capital ratios were 339% for UPC, 433% for FSIC and 867% for IIC.

Material changes, liquidity and capital

• Net income fell 79% year over year, chiefly reflecting higher catastrophe losses, adverse reserve development and worsening underlying loss experience. Management cited higher fire and weather losses, water-related claim frequency and severity, and lower average premiums as pressures on underlying loss ratios.
• Operating cash flow declined by $32.6 million. Management attributed the decrease mainly to higher claims payments and reinsurance payments, partly offset by increased premium collections.
• Investing activities used $49.8 million of cash; financing activities provided $49.9 million, including $35.2 million of net borrowing proceeds. Year-end cash and cash equivalents were $150.7 million.
• Debt increased with an $8.6 million seller note related to the IIC acquisition, a $5.2 million BB&T term loan and $30.0 million of senior notes issued in December. The senior notes carry interest at three-month LIBOR plus 5.75%, mature in 10 years and include a maximum debt-to-capital covenant of 20% beginning December 31, 2017.
• Management stated that current capital resources and operating cash flows should meet anticipated working-capital needs, while cautioning that future sufficiency is not assured. No off-balance-sheet arrangements were reported.
• Quarterly dividends were $0.05 per share in Q1 2016 and $0.06 per share in Q2–Q4; total dividends paid were $5.0 million. A $0.06 per-share dividend for Q1 2017 was declared after year-end.

Outlook, transactions and risks

• Management expected premium growth to continue through expansion in existing states and licensed markets. Its stated 2017 priorities included completing the AmCo merger, broadening products, improving reinsurance efficiency, expanding distribution and using technology and analytics to manage exposure and profitability.
• The AmCo transaction was expected to leave existing UIHC shareholders with approximately 51% and RDX members with approximately 49% of the combined company. Completion, integration, dilution, regulatory approvals and the resulting concentration in Florida remained material uncertainties at the filing date.
• In Q4 2016, the company assumed more than 3,100 Citizens wind-only policies (about $4.6 million annualized premium) and more than 3,900 Texas Windstorm Insurance Association policies (about $6.6 million annualized premium); amounts could be reduced by opt-outs and cancellations.
• Catastrophe risk, Florida concentration, reinsurance availability and counterparty collections, reserve estimation, regulation and rate approvals, agent and managing-general-agent relationships, litigation, investment-market exposure, and acquisition integration are prominent disclosed risks.
• The 2016–17 catastrophe program provided $1.515 billion of stated protection above $10 million; its estimated cost was $191.5 million. The company also disclosed a 20% quota-share agreement effective December 1, 2016, and an aggregate excess-of-loss program effective January 1, 2017.
• Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls. No material non-claims-related legal actions were reported at year-end.

Important facts for investors to verify

1. Confirm the filing and issuer: this is UIHC’s 2016 Form 10-K, not American Coastal Insurance Corp.’s standalone filing.
2. Check the final status, terms, share issuance and integration results of the proposed AmCo merger; it had not closed as of the filing.
3. Review subsequent catastrophe experience, claims development and reserve adequacy, particularly the 2016 unfavorable reserve development and rising underlying loss ratio.
4. Verify realized reinsurance recoveries, renewal pricing and protection limits, including the cost and operation of the quota-share and aggregate coverage.
5. Assess debt service, floating-rate exposure and compliance with the senior-note debt-to-capital covenant, alongside limits on insurance-subsidiary dividends.
6. Compare subsequent earnings and cash generation with the 2016 deterioration in net income, combined ratio and operating cash flow.