AMERICAN COASTAL INSURANCE Corp quarterly report, Q3 FY2011

United Insurance Holdings Corp. — Q3 2011 Form 10-Q

Issuer identification: The filing is for United Insurance Holdings Corp., although the request metadata names American Coastal Insurance Corp. The filing covers the quarter and nine months ended September 30, 2011; financial amounts below are in thousands of dollars unless stated otherwise.

Business context and reporting period

The company writes and services property and casualty insurance, principally homeowners and dwelling policies, through subsidiaries operating in Florida and South Carolina. It formed UPC Re in April 2011 to provide reinsurance protection to its insurer. Massachusetts and Rhode Island authorized UPC to write business during 2011; writing in Massachusetts began November 1, 2011, and Rhode Island operations were expected to begin in Q1 2012.

Financial performance and position

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Gross premiums written	$44.3 million	$36.0 million	$160.3 million	$127.3 million
Net premiums earned	$23.9 million	$17.9 million	$65.3 million	$48.9 million
Total revenue	$25.5 million	$20.0 million	$70.0 million	$56.3 million
Net income (loss)	$3.7 million	$(0.3) million	$4.9 million	$(3.8) million
Diluted EPS	$0.35	$(0.03)	$0.46	$(0.36)
Net investment income	$0.8 million	$1.0 million	$2.0 million	$3.1 million

Q3 loss and loss-adjustment expenses were $8.4 million, versus $11.5 million a year earlier. The loss ratio, calculated as losses and LAE divided by net premiums earned, was approximately 35% versus 64%. For the nine-month periods, the ratio was approximately 45% versus 66%.
Q3 expenses totaled $19.6 million, compared with $20.5 million. Nine-month expenses were $61.9 million, roughly flat year over year. Lower losses and LAE drove the return to profitability; higher premiums also reflected policy growth and rate increases.
At September 30, total assets were $286.1 million, investments $135.9 million, cash and cash equivalents $49.7 million, total liabilities $234.3 million, and stockholders’ equity $51.8 million. Cash was $71.6 million at December 31, 2010.
Operating cash flow for the first nine months was $54.8 million, compared with $8.8 million in 2010. Investing activities used $78.2 million, primarily reflecting purchases of investments; cash declined by $21.9 million overall.
Notes payable were $17.4 million, down from $18.2 million at year-end 2010. The SBA note carried a 3.14% interest rate. The company reported compliance with its debt covenants and UPC statutory surplus of $47.6 million.
Other comprehensive income included a $2.1 million net-of-tax improvement in unrealized investment gains; accumulated other comprehensive income was $1.8 million, versus a $0.2 million accumulated loss at year-end 2010.

Material changes and management commentary

Gross premiums written rose about 23% in Q3 and 26% for the first nine months. Management attributed growth to more policies written and Florida rate increases, including a 15.9% average homeowners increase effective May 2011. An approved 7.5% homeowners and 14.9% dwelling rate increase was scheduled for November 2011. The filing says rate increases can take up to two years to fully affect net income.
Management attributed improved losses to lower frequency and severity of current-year claims and fewer large fires and water-related losses than in 2010. The company settled outstanding Hurricane Wilma claims with the Florida Hurricane Catastrophe Fund for $12.7 million; because this was below the recorded recoverable, catastrophe losses increased by $0.9 million in Q2.
Nine-month investment income fell by $1.0 million, which management attributed to reinvesting proceeds from prior sales of higher-yielding corporate bonds into lower-yielding U.S. government and agency securities.
The 2011–2012 reinsurance program carried premiums of approximately $40.8 million for private catastrophe coverage, an estimated $32.6 million for FHCF coverage, $11.5 million for reinstatement-premium protection, and $0.9 million for per-risk coverage. The FHCF premium and coverage terms remained subject to final adjustment.
The company reported no formal earnings guidance. Management believed existing resources and operating cash would meet currently anticipated working-capital needs, but cautioned that this was not assured. It did not anticipate needing Federal Home Loan Bank credit facilities in the near term.
The board declared a $0.05-per-share dividend on November 9, 2011, payable December 15, 2011. The company had repurchased 212,083 shares for $431,000 in May 2011. Its 7,077,375 warrants expired October 4, 2011.

Risks, contingencies, and unusual items

Catastrophe exposure is a principal risk. The company retained the first $15.0 million of hurricane losses and $25.0 million of non-hurricane catastrophe losses per event under its current program; losses beyond reinsurance limits remain its responsibility. It also depends on reinsurers’ ability to pay. Management added discussion of potential climate-change effects on weather, claims, reinsurance costs, and insurance availability.
UPC’s ability to pay dividends is restricted by insurance regulation, capital requirements, and the SBA note. The note is a surplus note, and principal or interest payments require regulatory permission. The company said it complied with covenants at September 30, 2011.
Claims-related litigation arises in the ordinary course of business; the filing does not quantify a specific material litigation contingency. Loss reserves, reinsurance recoverables, and acquisition costs rely on estimates that may differ from actual outcomes.
A related-party management services agreement with 1347 Advisors began August 29, 2011, providing interim CFO, actuarial, and other services for $60,000 per month plus expenses. The company recorded $60,000 of expense in Q3.
UPC purchased $2.25 million of notes from Hamilton Risk Management, a company with director connections; the transaction included a $302,000 partnership interest, written down to zero in Q2. Synovus, which had owned 14.9% of the company, sold all its shares on September 28, 2011.
Management assessed disclosure controls as effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Confirm the issuer identity and whether this filing is the intended company’s report, given the mismatch between the metadata and the filing.
Review the final FHCF terms and the total cost, attachment points, and available limits of the 2011–2012 reinsurance program.
Assess reserve adequacy, catastrophe exposure, and reinsurance recoverable collectability, including the effect of the Hurricane Wilma commutation.
Track the timing and earned-premium impact of approved rate increases, policy growth, and expansion into new states.
Monitor statutory surplus, debt covenant headroom, regulatory limits on insurer dividends, and cash needs for remaining reinsurance installments.
Consider the effect of lower investment yields and the related-party advisory arrangement on future earnings and expenses.