AMERICAN COASTAL INSURANCE Corp quarterly report, Q2 FY2018

Business context and reporting period

This is United Insurance Holdings Corp.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing identifies American Coastal Insurance Company (ACIC) as a wholly owned insurance subsidiary; it is not a standalone ACIC filing. The company writes residential and commercial property and casualty insurance, with substantial exposure to Florida.

Financial performance and position

Amounts are in millions of dollars unless stated otherwise.

• Q2 net loss ratio was 51.7% (54.5% prior year); expense ratio was 42.5% (48.7%). Six-month ratios were 49.3% and 45.7%, respectively. Underlying combined ratio, a non-GAAP measure, was 84.6% in Q2 and 88.5% for the six months.
• Q2 core income, a non-GAAP measure, was $15.5 million versus $19.1 million; six-month core income was $33.3 million versus $24.5 million. Core income per diluted share was $0.36 and $0.78, respectively.
• Net investment income was $6.8 million in Q2 and $12.3 million for the six months. Six-month comprehensive income was $2.4 million, including $27.4 million of net-of-tax unrealized investment losses.
• At June 30, total assets were $2.318 billion, stockholders’ equity $544.7 million, and book value per share $12.72. Cash, cash equivalents and restricted cash totaled $242.2 million, including $208.7 million unrestricted cash.
• Six-month operating cash flow was $78.6 million, compared with $58.4 million; investing activities used $106.7 million, versus providing $65.1 million in 2017. Cash, cash equivalents and restricted cash declined $34.1 million during the first half.
• Debt schedule lists $163.9 million of debt, including $150 million of 6.25% senior notes due 2027; the balance sheet reports notes payable of $160.7 million, reflecting debt issuance costs. The company reported compliance with debt covenants.

Material changes versus comparable periods

• Gross written premiums increased 9.2% in Q2 and 27.5% for the first half. Policies in force rose 14.1% year over year to 557,523 at June 30.
• Net income increased 102.7% in Q2 and 106.8% for the first half. Management attributed the increases to premium growth and lower merger-related costs and amortization than in 2017.
• Comparisons are affected by the April 2017 AmCo acquisition: 2018 includes six months of AmCo results, versus three months in first-half 2017. The filing also reports about $7 million of nonrecurring merger expenses in 2017.
• Reinsurance costs were 38.8% of gross premiums earned in Q2, up from 37.1%, primarily reflecting expanded catastrophe protection. New accounting treatment for equity securities moved fair-value changes into earnings; the filing recorded a $1.1 million unrealized equity loss for the first half.

Outlook, risks and unusual items

• Management expects gross written premium growth to continue through growth in current markets and expansion into states where the company is licensed; no specific earnings or premium-growth target is provided.
• The June 2018 catastrophe program provides up to $3.1 billion of coverage, with a stated approximate single-event 1-in-400-year level of protection. Reinsurance does not eliminate risk: the company remains liable if reinsurers fail to pay. The company also reported $20 million of recoverables under an aggregate excess-of-loss treaty, with future recovery subject to treaty terms and loss experience.
• Weather and catastrophe exposure, especially in Florida, claims-reserve estimation, reinsurance availability and collectability, investment-market risk, and regulatory requirements are key risks. Management increased its ultimate gross estimate for Hurricane Irma losses during the first half; the reserve adjustment had no net Q2 earnings impact because it was fully ceded under the catastrophe program.
• Disclosure controls were determined not effective at quarter-end because of previously identified material weaknesses involving monitoring of third-party IT controls and accounting controls for income taxes, acquisition accounting and investments. Remediation was underway but not yet tested as effective.
• The company reported no material non-claims-related legal actions, no material changes in previously disclosed risk factors, and no material changes in market risk. It received a recoupable $570,000 Texas Fair Plan assessment.
• The board declared a $0.06 per-share quarterly dividend after quarter-end, payable August 20, 2018.

Important facts for investors to verify

• Confirm the intended registrant: the supplied filing is United Insurance Holdings Corp.’s 10-Q, with ACIC as a subsidiary, rather than a standalone American Coastal Insurance Corp. filing.
• Review the drivers and sustainability of premium growth, especially commercial-property and assumed business growth, and the contribution of the AmCo acquisition to year-over-year comparisons.
• Assess catastrophe exposure, 2018–19 reinsurance terms and costs, Hurricane Irma reserve development, and the timing and collectability of reinsurance recoverables.
• Monitor claims reserves, the reported material control weaknesses and remediation testing, and statutory capital/dividend constraints at insurance subsidiaries.
• Reconcile GAAP net income with management’s non-GAAP core income and underlying combined ratio, and evaluate the impact of investment valuation changes and debt service.