Filing summary: United Insurance Holdings Corp. (UIHC)
Entity and period: This is UIHC’s Form 10-K for the fiscal year ended December 31, 2018, not a standalone fourth-quarter report. American Coastal Insurance Company (ACIC) is a UIHC subsidiary; the filing reports consolidated results for the parent and subsidiaries.
Business context
UIHC is a property and casualty insurer focused on personal and commercial property coverage in catastrophe-exposed U.S. markets. It operated in 12 states, with 41.2% of policies in force in Florida. Policies in force grew 10.2% to 582,096. Commercial property represented about 28% of the product mix by year-end, reflecting diversification following the 2017 AmCo acquisition. In August 2018, UIHC formed Journey Insurance Company (JIC) with Tokio Marine Kiln; UIHC owns 66.7%.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Gross premiums written | $1,252.4 million | $1,040.8 million |
| Net premiums earned | $689.3 million | $585.5 million |
| Total revenue | $723.9 million | $654.4 million |
| Net income attributable to UIHC | $0.3 million | $10.1 million |
| Diluted earnings per share | $0.01 | $0.27 |
| Combined ratio | 104.3% | 111.1% |
| Underlying combined ratio (non-GAAP) | 89.2% | 85.4% |
| Net cash from operating activities | $10.1 million | $14.3 million |
Gross written premiums increased 20.3%, primarily from organic growth in new and renewal business. Net investment income rose to $26.2 million from $17.1 million. Total expenses increased to $728.3 million from $653.7 million. The loss ratio improved to 59.3% from 62.4%, while the expense ratio improved to 45.0% from 48.7%; nevertheless, the combined ratio remained above 100%, indicating an underwriting loss. The underlying combined ratio worsened year over year.
At December 31, 2018, total assets were $2.321 billion, total liabilities $1.781 billion, and total stockholders’ equity $540.4 million. Cash, cash equivalents and restricted cash totaled $184.1 million, down from $276.3 million. Investments were $951.8 million. Net cash used in investing activities was $125.6 million; financing activities provided $23.4 million.
Notes payable, net, were $160.1 million on the consolidated balance sheet; the debt note reports $163.1 million of total long-term debt before applicable issuance-cost presentation. This includes $150 million of 6.25% senior notes due 2027. Management reported financial leverage of 23%, against a senior-note covenant limit below 30%, and compliance with debt covenants. Statutory surplus was $437.4 million. Subsidiary RBC ratios exceeded minimum requirements.
Material changes and unusual items
- UIHC’s net income attributable to shareholders fell 97.1% to $0.3 million. The filing attributes the decline primarily to higher losses and loss adjustment expenses and policy acquisition costs.
- Loss and LAE rose 11.8% to $408.6 million. Current-year catastrophe losses were $100.0 million, compared with $116.4 million in 2017. 2018 included Hurricane Florence and Hurricane Michael; management estimated $50 million of retained pre-tax catastrophe losses, net of reinsurance, from those storms.
- Prior-year reserves developed unfavorably by $4.3 million in 2018, versus favorable development of $2.6 million in 2017. Management increased estimates for Hurricane Irma losses, with no net 2018 earnings impact from that revision because it was ceded under the catastrophe reinsurance program.
- Reinsurance recoverables increased to $626.0 million from $395.8 million; gross unpaid losses and LAE rose to $661.2 million from $482.2 million. Management expects elevated claim payments and reinsurance recoveries in the near term, with recoveries expected to largely offset claim cash outflows.
- Other revenue declined to $15.1 million from $51.1 million, in part reflecting the 2018 presentation of ceding commissions as offsets to ceded premiums and policy acquisition costs rather than as other revenue. The company reported $9.3 million of net unrealized losses on equity securities, with fair-value changes in equity investments recognized in earnings following adoption of ASU 2016-01.
- Fourth-quarter 2018 revenue was $181.1 million and the net loss attributable to UIHC was $11.1 million, compared with third-quarter revenue of $187.7 million and a net loss attributable to UIHC of $11.7 million.
- Cash dividends were $0.06 per share quarterly in 2018. Management said it expected to continue that quarterly rate in 2019, subject to board discretion and regulatory and financial constraints.
Outlook, risks and contingencies
Management expects gross written premium growth to continue through growth in existing markets and expansion into states where UIHC is licensed. The filing provides no quantified earnings or premium-growth guidance. The 2018–2019 catastrophe excess-of-loss program provided up to $3.1 billion of protection, and the 20% quota-share agreement was extended through May 31, 2019. The company remains liable to policyholders if reinsurers do not pay amounts due.
Key risks include catastrophe exposure and Florida concentration; uncertainty in loss reserves; reinsurance pricing, availability and collectability; dependence on agents and AmRisc for commercial business; investment and interest-rate risk; regulation and limits on subsidiary dividends; and debt covenant compliance. UIHC reported no material non-claims-related legal actions at year-end. It had $2.5 million of unfunded limited-partnership commitments.
Controls and audit: The auditor issued an unqualified opinion on the financial statements, but an adverse opinion on internal control over financial reporting. Management also concluded disclosure controls and internal controls were ineffective because the company had not performed ongoing monitoring to confirm controls were operating. Management planned to execute monitoring activities in 2019.
Investor verification priorities
- Review reserve adequacy and subsequent development, especially for the 2017 and 2018 storm years and the $661.2 million gross unpaid-loss balance.
- Assess the collectability and timing of the $626.0 million in reinsurance recoverables and the company’s net catastrophe exposure under renewed programs.
- Track underwriting profitability: the combined ratio remained above 100%, while the underlying combined ratio increased to 89.2%.
- Confirm remediation and auditor assessment of the material weakness in internal-control monitoring.
- Verify subsidiary statutory capital, dividend capacity, debt covenant headroom, and the sustainability of the $0.06 quarterly dividend.
- Monitor Florida concentration and reliance on AmRisc, including the related-party relationship and commercial business production.