Business Context and Reporting Period
Company: United Insurance Holdings Corp. (formerly FMG Acquisition Corp.)
Reporting Period: Quarter and nine months ended September 30, 2008
Business Overview: The Company operates as a property and casualty insurer in Florida through its subsidiary, United Property & Casualty Insurance Company (UPCIC). On September 30, 2008, the Company completed a reverse acquisition and merger with United Insurance Holdings, L.C. (UIH), transitioning from a blank-check company to an operating insurance entity. The financial statements reflect the historical operations of UIH.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Net Premiums Earned | $20,089 | $60,374 | $62,199 |
| Total Revenue | $25,992 | $77,382 | $84,368 |
| Net Income | $8,878 | $26,570 | $31,743 |
| Diluted EPS | $0.75 | $2.26 | $2.70 |
| Operating Cash Flow | N/A | $31,296 | $13,040 |
| Total Assets | $242,725 | $242,725 | $242,426 (Dec 31, 2007) |
| Total Liabilities | $207,828 | $207,828 | $196,327 (Dec 31, 2007) |
| Stockholders' Equity | $34,897 | $34,897 | $46,099 (Dec 31, 2007) |
| Cash and Equivalents | $34,667 | $34,667 | $56,852 (Dec 31, 2007) |
Debt: Total notes payable (current and long-term) were $41,206 ($4,327 current + $36,879 long-term) as of September 30, 2008. This includes a $20,000 note to the Florida State Board of Administration and new notes issued in connection with the merger.
Material Changes vs. Prior Period
- Revenue Decline: Net premiums earned decreased 2.9% year-over-year for the nine-month period ($60.4M vs $62.2M). Gross premiums written fell 9.3% due to lower average premiums per policy driven by new wind mitigation credits and a shift in geographic mix, despite an increase in policies-in-force.
- Expense Increase: Loss and loss adjustment expenses (LAE) increased 35.4% to $25.0M for the nine months ended September 30, 2008. This was primarily driven by $3.6M in incurred losses from Tropical Storm Fay and a $4.4M increase in incurred but not reported (IBNR) reserves.
- Profitability: Net income decreased 16.3% to $26.6M for the nine-month period. This decline was offset by a $2.6M gain in "Other Income" resulting from the reversal of a Put liability associated with the merger.
- Investment Portfolio: Total investments increased to $122.7M. However, the portfolio suffered $5.2M in net unrealized losses, primarily due to declines in corporate bond values amidst a slowing global economy.
- Merger Impact: The completion of the merger on September 30, 2008, resulted in significant changes to the capital structure, including the issuance of 8.9M shares and warrants, and the conversion of the operating entity to a C-corporation for tax purposes effective October 1, 2008.
Guidance, Outlook, Risks, and Unusual Items
- Merger Consideration: Former UIH members may receive up to $5 million in additional cash consideration if specific net income targets are met in the periods ending June 30, 2009, and December 31, 2009.
- Policy Assumption: The Company plans to assume approximately 75,000 policies from Citizens Property Insurance Corporation over 18 months, starting October 2008. Approximately 4,100 policies were assumed in October 2008.
- Dividend Restrictions: Due to debt covenants requiring consolidated net worth to remain above $45 million, and because the Company's net worth was $34.9 million at period end, the Company is currently prohibited from paying dividends or distributions to stockholders.
- Interest Rate Penalties: The Company incurred interest rate penalties on its FSBA note in Q2 and Q3 2008 due to failing to meet writing ratio covenants. However, an amendment effective July 1, 2008, allowed the Company to meet the revised ratio in Q3, avoiding penalties for Q4 2008.
- Risks: Key risks include geographic concentration in Florida (hurricane exposure), regulatory changes in Florida insurance laws, reinsurance credit risk, and the potential for additional assessments from the Florida Hurricane Catastrophe Fund (FHCF) or Florida Insurance Guaranty Association (FIGA).
Investor Verification Checklist
- Merger Accounting: Verify the treatment of the reverse acquisition and the retroactive restatement of equity and EPS.
- Catastrophe Reserves: Assess the adequacy of loss reserves given the $3.6M impact from Tropical Storm Fay and the Company's exposure to future hurricane seasons.
- Debt Covenants: Monitor compliance with the $45 million consolidated net worth covenant which currently restricts dividend payments.
- Investment Valuation: Review the $5.2M in unrealized investment losses and the potential for further impairment in the corporate bond portfolio.
- Regulatory Capital: Confirm that statutory surplus ($52.6M) continues to exceed Florida's minimum requirements and premium-to-surplus ratios.