Business context and reporting period
United Insurance Holdings Corp. (the registrant named in the filing; the request metadata identifies American Coastal Insurance Corp.) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company is a property and casualty insurer focused primarily on homeowners’ coverage, operating through insurance and service subsidiaries in one business segment. Its established markets included Florida, North Carolina, South Carolina, Massachusetts and Rhode Island; it was licensed in New Jersey and Texas in April 2013.
Key financial results
Unless otherwise noted, amounts are in millions of dollars. Income-statement and cash-flow comparisons are for the three months ended March 31; balance-sheet comparisons are against December 31, 2012.
| Metric | Q1 2013 | Q1 2012 or prior balance date |
|---|---|---|
| Total revenue | $44.17 | $29.50 |
| Net premiums earned | $42.30 | $27.79 |
| Gross premiums written | $87.75 | $58.00 |
| Net income | $4.35 | $4.75 |
| Diluted earnings per share | $0.27 | $0.46 |
| Net loss and loss-adjustment expenses | $20.55 | $9.48 |
| Combined ratio | 87.5% | 79.0% |
| Operating cash flow | $32.13 | $19.07 |
- Revenue increased 50%, primarily reflecting 52% growth in net premiums earned. Gross written premiums rose 51%, driven by business growth and the January assumption of 15,133 Citizens policies.
- Net income declined 8%; diluted EPS fell from $0.46 to $0.27, with the share count substantially higher year over year. Net income was about 9.9% of revenue, versus about 16.1% in Q1 2012.
- The loss ratio increased to 48.6% from 34.1%, while the expense ratio improved to 38.9% from 44.9%. The company’s non-GAAP underlying combined ratio was 79.2%, compared with 79.7%.
- Cash and cash equivalents were $64.91 million, down from $71.21 million. Investments were $193.57 million, up from $152.18 million; cash plus investments totaled $258.47 million.
- Total assets were $327.78 million; total liabilities were $232.08 million and stockholders’ equity was $95.70 million. Notes payable were $15.59 million, down from $15.88 million.
- Operating cash flow was $32.13 million; investing activities used $41.24 million and financing activities provided $2.81 million. Cash ended the quarter at $64.91 million.
- The company declared and paid a quarterly dividend of $0.03 per share. Book value per diluted share was $5.91, versus $5.70 at year-end 2012.
Material changes and notable items
- Loss and loss-adjustment expenses more than doubled, reflecting increased policy exposure, $1.82 million of current-year catastrophe losses, adverse development in the commercial auto line in run-off, and development on prior-year catastrophe and non-catastrophe claims. Management cited severe winter weather in Massachusetts and a severe thunderstorm in Orlando; fire and sinkhole losses also increased.
- Reported combined ratio worsened by 8.5 percentage points, although the underlying combined ratio was slightly better. The filing attributes the gap to catastrophe losses and prior-year development.
- Investment income declined slightly to $0.72 million from $0.75 million, and realized investment results shifted from an $81,000 gain to a $12,000 loss.
- The company issued 750,000 shares when the underwriter exercised its over-allotment option, receiving $3.59 million in net proceeds. Investment purchases drove the quarter’s investing cash outflow, partly funded by operating cash and proceeds from the prior offering.
- Prepaid reinsurance premiums declined as coverage was amortized and the company paid the final installment on its 2012–2013 reinsurance contracts. The filing states that the current reinsurance agreement terms were unchanged.
Outlook, risks and contingencies
- Management expected gross written premium growth to continue through expansion in existing states and entry into additional states. It also implemented an average 9.5% rate increase on new and renewal Florida homeowners’ business effective February 1, 2013. The filing provides no numerical earnings or revenue guidance.
- Management said current capital resources and operating cash flows were expected to meet anticipated working-capital needs, while cautioning that future sufficiency was not assured. The holding company depends on subsidiary cash flows, and insurer dividends and management fees are subject to regulatory constraints.
- The insurance affiliate reported $69.29 million of statutory policyholder surplus and stated that it met applicable regulatory requirements. The SBA surplus note was $15.59 million; the company reported compliance with its covenants, including applicable premium-to-surplus ratios.
- Principal disclosed risks include catastrophic weather, reinsurance cost and availability, insurance regulation and assessments, competition, investment-market exposure, claims and reserve estimates, rating downgrades, and litigation. The company was involved in ordinary-course claims-related legal actions; the filing reports no material changes to the risk factors in its 2012 Form 10-K and no off-balance-sheet arrangements.
- Management identified estimates for unpaid losses, reinsurance recoverables, deferred acquisition costs and investments as areas involving judgment. No material changes to critical accounting policies were reported.
Important facts for investors to verify
- Confirm the registrant’s identity and continuity with American Coastal Insurance Corp.; this filing is issued under the name United Insurance Holdings Corp.
- Track reserve adequacy and subsequent development, particularly catastrophe claims, fire and sinkhole losses, and the commercial auto run-off line.
- Review reinsurance protection, renewal pricing, recoverables and the effect of the Citizens policy assumption on earned premiums and exposure.
- Monitor statutory surplus, regulatory limits on subsidiary distributions, and continued compliance with the SBA note covenants.
- Assess whether premium growth and new-state expansion can be sustained without deterioration in underlying loss and combined ratios.