United Insurance Holdings Corp. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing identifies the registrant as United Insurance Holdings Corp. (UPC Insurance), a property and casualty insurer focused primarily on homeowners coverage. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $67.7 | $48.7 | $135.2 | $92.8 |
| Net premiums earned | $64.2 | $46.0 | $128.2 | $88.3 |
| Net income | $9.6 | $4.5 | $21.0 | $8.9 |
| Diluted EPS | $0.46 | $0.28 | $1.09 | $0.55 |
| Combined ratio | 81.2% | 89.8% | 79.5% | 88.7% |
| Underlying combined ratio (non-GAAP) | 82.4% | 82.0% | 80.2% | 80.6% |
- Q2 revenue rose 39% and six-month revenue rose 46% year over year, principally on growth in earned premiums. Gross written premiums increased 25% in Q2 and 14% for the first half.
- Net loss and LAE ratios improved to 44.8% for Q2 and 44.0% for the first half, from 50.0% and 49.3%. However, underlying loss costs increased: management cited higher severity of water-related claims in Florida and water/freeze losses in Massachusetts and Rhode Island.
- Current-period catastrophe losses were $0.3 million in the first half, versus $3.6 million in the prior-year period. Favorable prior-year reserve development was $1.2 million, compared with unfavorable development of $3.5 million in 2013. These factors aided reported results; underlying combined ratios were nearly flat year over year.
- Investment income was $1.6 million in Q2 and $3.1 million in the first half, versus $0.8 million and $1.6 million, respectively. Net realized investment gains were $0.03 million and $0.05 million, versus losses in 2013.
Financial position, cash flow and capital
- At June 30, cash and cash equivalents were $79.7 million; investments were $347.4 million; and cash plus investments totaled $427.1 million, up from $323.8 million at year-end 2013.
- Total assets were $636.9 million, liabilities $452.5 million, and stockholders’ equity $184.4 million. Book value per share was $8.85, compared with $6.64 at December 31, 2013.
- Unpaid losses and LAE were $50.9 million; unearned premiums $219.1 million; and reinsurance payable $133.3 million. Prepaid reinsurance premiums were $131.9 million.
- Six-month operating cash flow was $48.0 million, down from $70.6 million. Investing activities used $54.8 million. Financing provided $51.7 million in the cash flow statement, including $54.0 million net proceeds from a March stock offering of 4.6 million shares. Cash increased $44.9 million to $79.7 million.
- Notes payable were $14.1 million, down from $14.7 million; the variable-rate note carried a 2.73% rate. The company reported compliance with its covenants. The insurer’s statutory policyholder surplus was $91.1 million and it met applicable regulatory requirements.
- Dividends declared were $0.04 per share in each of Q1 and Q2, versus $0.03 per share in the comparable 2013 quarters. A further $0.04 dividend was declared August 1, payable August 22, 2014.
Material developments, outlook and risks
- Growth was driven by new and renewal policies, including expansion outside Florida. Policies in force were 215,387 at June 30, up 28.1% from a year earlier. Management expects written-premium growth to continue through expansion in current and additional states; no quantified earnings or revenue guidance was provided.
- The 2014–15 catastrophe reinsurance program provides up to $1.0802 billion of stated catastrophe protection above the company’s retention. The filing reports approximately $90.6 million in private catastrophe reinsurance cost and approximately $41.7 million initial Florida Hurricane Catastrophe Fund premium. Coverage, attachment points, exclusions and recoverability remain important risks.
- Management expects reinvestment yields to remain below the existing portfolio yield for some time and capital markets to remain volatile. A hypothetical 100-basis-point rise in interest rates would reduce fixed-maturity fair value by $10.6 million (3.71%); a 300-basis-point rise would reduce it by $31.8 million (11.12%).
- Insurance-company cash and dividends are subject to regulatory restrictions; the holding company depends substantially on subsidiary cash flows. Management said current resources and operating cash flows should meet anticipated working-capital needs, but gave no assurance for future periods.
- Risks include catastrophe exposure and weather, reinsurance cost and availability, water-related loss severity, reserve-estimation uncertainty, litigation and emerging coverage issues, regulatory constraints, investment-market risk, and technology, cybersecurity and outsourcing disruptions. The company disclosed claims-related litigation, including class-action matters, but the filing does not provide a clear quantified exposure or settlement estimate.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether underlying loss severity, particularly water-related claims, continues to rise and affects future loss and combined ratios.
- How reserve estimates and favorable prior-year development evolve, and whether disclosed litigation could materially affect reserves or results.
- The terms, limits, exclusions, cost and counterparty security of catastrophe reinsurance, including actual recoveries following a major event.
- Statutory surplus, insurer dividend capacity, and compliance with the SBA note’s writing-ratio covenants as premium growth continues.
- The investment portfolio’s exposure to interest rates and credit risk, including the new $44.0 million mutual fund investment and the effect of reinvestment yields.
- The effects of the 4.6 million-share offering on dilution and per-share performance; also reconcile the MD&A financing-cash-flow figure ($51.787 million) with the cash flow statement ($51.677 million).