Business Context and Reporting Period
Company: United Insurance Holdings Corp. (formerly FMG Acquisition Corp.)
Reporting Period: Quarterly period ended September 30, 2009 (Form 10-Q)
Business Overview: The company operates as a property and casualty insurer in Florida, primarily writing homeowner and dwelling policies through its subsidiary, United Property & Casualty Insurance Company (UPCIC). It also writes flood insurance under the National Flood Insurance Program (NFIP). The company is a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|
| Net Premiums Earned | $18.4 million | $61.9 million | $60.4 million |
| Total Revenue | $20.7 million | $69.0 million | $77.4 million |
| Net Income (Loss) | $(0.7) million | $5.2 million | $26.6 million |
| Earnings Per Share (Basic) | $(0.07) | $0.50 | $2.52 |
| Cash and Cash Equivalents | $64.5 million (Sep 30, 2009) | Increased $32.8 million from beginning of period | |
| Total Assets | $303.8 million (Sep 30, 2009) | Up from $233.1 million (Dec 31, 2008) | |
| Total Liabilities | $253.4 million (Sep 30, 2009) | Up from $190.2 million (Dec 31, 2008) | |
| Notes Payable (Net) | $41.6 million (Sep 30, 2009) | Includes $18.3M Merger Notes and $20M SBA Note |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the nine months ended September 30, 2009, dropped significantly to $5.2 million from $26.6 million in the prior year. The third quarter of 2009 resulted in a net loss of $0.7 million compared to $8.9 million in the prior year quarter.
- Revenue Composition: While Gross Premiums Written increased 20% year-over-year for the nine-month period ($128.5M vs $106.8M), Total Revenue decreased due to the absence of a $6.4 million policy assumption bonus received in 2008 and a $1.9 million other-than-temporary impairment (OTTI) charge on equity investments in 2009.
- Expense Increases: Losses and Loss Adjustment Expenses (LAE) rose to $30.9 million (nine months 2009) from $25.0 million (nine months 2008), driven by an increase in policies-in-force and non-catastrophe claims (fire and roof damage), despite no major hurricane losses in 2009 compared to Tropical Storm Fay in 2008.
- Reinsurance Costs: Gross premiums ceded increased 58.6% to $89.6 million for the nine months ended September 30, 2009, primarily due to a $33.8 million increase in the cost of catastrophe reinsurance contracts for the 2009-2010 policy year.
- Investment Portfolio: The company recorded a $1.9 million OTTI charge on equity securities in the first quarter of 2009. Net investment income decreased 26.4% year-over-year due to lower interest rates.
Guidance, Outlook, and Risks
- Rate Increases: The company received approval for a 12.7% rate increase for the Protector Homeowner Program (effective Sept 15, 2009) and a 15% increase for the Guardian Dwelling Fire Program (effective Oct 15, 2009). An additional 14.3% rate increase application is pending with the Florida Office of Insurance Regulation (OIR) to recover reinsurance costs.
- Growth Outlook: Management anticipates slower growth for the remainder of 2009 compared to the first nine months due to risk exposure management measures.
- Dividends: The Board approved a quarterly dividend of $0.05 per share to be paid on December 15, 2009. Future dividends are not guaranteed and are subject to regulatory restrictions and debt covenants.
- Key Risks:
- Catastrophe Exposure: Significant exposure to hurricanes and severe weather in Florida. While reinsurance covers up to the estimated 100-year probable maximum loss, losses exceeding coverage would be retained.
- Regulatory Environment: Subject to Florida insurance regulations, including premium rate restrictions, wind mitigation credit requirements, and assessments from the Florida Hurricane Catastrophe Fund (FHCF) and Citizens Property Insurance Corporation.
- Debt Covenants: The company must maintain a consolidated net worth of at least $45 million and statutory surplus above $50 million to comply with debt covenants. Dividends are restricted if they would breach these thresholds.
Investor Verification Checklist
- Reinsurance Adequacy: Verify the sufficiency of the $83.6 million reinsurance program against potential hurricane losses exceeding the $16.4 million retention limit.
- Rate Approval Status: Monitor the status of the pending 14.3% rate increase application with the Florida OIR, which is critical for offsetting rising reinsurance costs.
- Debt Covenant Compliance: Confirm that statutory surplus remains above the $50 million threshold required by the State Board of Administration (SBA) note and that consolidated net worth stays above $45 million to avoid default on Merger Notes.
- Investment Impairments: Review the aging of unrealized losses in the investment portfolio to assess the risk of future OTTI charges.
- Loss Reserve Adequacy: Evaluate the company's loss development trends, particularly regarding non-catastrophe claims (fire and roof damage) which drove expense increases in 2009.