Business Context and Reporting Period
Company: United Insurance Holdings Corp. (UIHC), operating primarily through its subsidiary United Property & Casualty Insurance Company (UPC).
Reporting Period: Fiscal year ended December 31, 2009.
Business Model: UIHC writes and services property and casualty insurance policies exclusively in Florida. Primary product lines include homeowner and dwelling fire policies. The company utilizes a network of approximately 1,800 agents and assumes policies from Citizens Property Insurance Corporation. In 2009, the company discontinued its commercial auto ("Garage") line of business.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Gross Premiums Written | $155.8 million | $141.6 million |
| Net Premiums Earned | $78.2 million | $81.1 million |
| Net Income | $4.1 million | $33.4 million |
| Net Investment Income | $4.8 million | $6.6 million |
| Net Realized Investment Gains | $1.8 million | $1.1 million |
| Other-Than-Temporary Impairments (OTTI) | ($1.9 million) | $0 |
| Total Assets | $247.8 million | $232.1 million |
| Total Liabilities | $199.7 million | $189.1 million |
| Stockholders' Equity | $48.1 million | $42.9 million |
| Cash and Cash Equivalents | $27.1 million | $29.5 million |
| Long-Term Debt (Net) | $41.4 million | $41.3 million |
| Unpaid Losses and LAE (Gross) | $44.1 million | $40.1 million |
Loss Ratios: The net loss ratio increased to 52.1% in 2009 from 34.6% in 2008. The gross non-catastrophe loss ratio was 28.5% in 2009 compared to 21.9% in 2008.
Material Changes Versus Prior Period
- Significant Decline in Net Income: Net income dropped 87.7% to $4.1 million from $33.4 million in 2008. This was primarily driven by a decrease in earned premiums and an increase in the effective tax rate.
- Premium Volume vs. Pricing: Gross premiums written increased 10.1% due to a 16% increase in policies-in-force (93,000 policies). However, the average premium per policy decreased 14% to $1,663, largely due to state-imposed wind-mitigation credits.
- Reinsurance Costs: Gross premiums ceded increased 55.2% to $92.0 million. Catastrophe reinsurance costs rose by $34.5 million (68%) due to increased total insured value and higher attachment points for the Florida Hurricane Catastrophe Fund (FHCF).
- Investment Performance: Net investment income decreased 27.2% due to lower interest rates. The company recorded $1.9 million in OTTI charges on equity securities in 2009, compared to none in 2008.
- Tax Rate Increase: The effective tax rate rose to 35.9% in 2009 from 19.7% in 2008, as the company began recording corporate taxes for all subsidiaries following the 2008 merger.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Rate Increases: The Florida Office of Insurance Regulation (OIR) approved rate increases to offset wind-mitigation credits and rising reinsurance costs. A 14% increase for the Protector Homeowner Program became effective March 15, 2010, and a 14.7% increase for the Guardian Dwelling Fire Program became effective April 15, 2010. Management notes these increases may take up to two years to fully impact net income.
- Expansion: Management is exploring expansion into seven additional states, with licensing attempts planned for 2010.
- Liquidity: The company expects positive cash flow from operations in 2010, barring catastrophic events. It maintains highly liquid assets to meet claim obligations.
Risks and Contingencies:
- Catastrophe Exposure: The company is exposed to hurricanes and windstorms. While reinsurance covers significant portions of losses, the company retains the first $16.4 million of hurricane losses and $26.4 million of non-hurricane losses per event.
- Reinsurance Availability: Rising costs and potential unavailability of reinsurance could force the company to reduce underwriting capacity or retain more risk.
- Regulatory Assessments: The company is subject to assessments from Citizens, the Florida Insurance Guaranty Association (FIGA), and the FHCF. A $1.0 million FIGA assessment was paid in December 2009 and is being recovered from policyholders.
- Debt Covenants: The company must maintain specific writing ratios and surplus levels to comply with its SBA note and Merger Notes. Failure to meet these could trigger interest penalties or acceleration of debt.
Investor Verification Checklist
- Reinsurance Recoverability: Verify the financial stability of reinsurers, particularly the Florida Hurricane Catastrophe Fund (FHCF), which holds a significant portion ($27.6 million) of the net unsecured recoverable balance.
- Loss Reserve Adequacy: Review the Statement of Actuarial Opinion and loss reserve development tables to assess the risk of future reserve deficiencies, especially regarding prior years' hurricane losses (e.g., Hurricane Wilma).
- Rate Filing Impact: Monitor the actual impact of the approved 2010 rate increases on earned premiums and underwriting profitability, noting the lag time in recognition.
- Debt Covenant Compliance: Confirm ongoing compliance with the SBA note's writing ratio covenants (1.5:1 net writing ratio) and surplus requirements ($50 million) to avoid interest penalties.
- Investment Portfolio Quality: Assess the credit quality of the fixed-maturity portfolio (96% of investments) and the potential for further other-than-temporary impairments in a volatile economic environment.