AMERICAN COASTAL INSURANCE Corp annual report, FY2011

Full document

Business Context and Reporting Period

Filing identity: The supplied 10-K identifies the registrant as United Insurance Holdings Corp. (UIHC), not American Coastal Insurance Corp. The filing covers the fiscal year ended December 31, 2011, and was filed March 14, 2012. Amounts below are in U.S. dollars, generally millions; the filing reports most financial amounts in thousands.

UIHC operates through insurance and service subsidiaries, principally writing homeowners and dwelling property insurance in Florida, South Carolina and Massachusetts. It also earns commissions on flood policies while ceding all related risk. Florida accounted for approximately 95% of premiums. In April 2011, the company formed UPC Re, a Cayman Islands reinsurer.

Financial Results and Position

Metric20112010
Gross premiums written$203.8 million$158.6 million
Net premiums earned$90.1 million$66.9 million
Total revenue$96.4 million$80.0 million
Net income (loss)$8.1 million$(0.9) million
Diluted earnings (loss) per share$0.77$(0.09)
Net cash provided by (used in) operations$38.6 million$(7.9) million
  • Losses and loss adjustment expenses were $38.9 million, down from $42.5 million. Prior-year claims developed favorably by $4.2 million, including an $892,000 adverse impact from settling the Hurricane Wilma reinsurance claim below the previously recorded recovery.
  • Net investment income fell to $2.8 million from $3.9 million; realized investment gains fell to $158,000 from $4.3 million. The prior-year gains largely reflected investment sales.
  • Cash and cash equivalents were $41.6 million; investments were $124.3 million. Together they totaled $165.9 million, versus $126.2 million at year-end 2010.
  • Total assets were $240.2 million, total liabilities $185.2 million, and stockholders’ equity $55.0 million. Unpaid losses and loss adjustment expenses were $33.6 million, including $3.3 million recoverable from reinsurers.
  • Notes payable were $17.1 million, consisting of the Florida State Board of Administration surplus note; the year-end stated rate was 1.99%. The company reported compliance with its covenants at year-end, although it paid additional interest in early 2011 for a fourth-quarter 2010 writing-ratio violation.
  • UPC statutory surplus was $48.2 million and exceeded stated minimum capital and risk-based capital requirements. Net written premium to surplus was 2.13:1.

Material Changes Versus 2010

  • Gross premiums written increased $45.2 million. The company wrote approximately 22,250 more policies, benefited from rate increases and higher retention, and wrote in South Carolina for a full year versus six months in 2010. Homeowner policyholders increased to approximately 101,800 from 80,500.
  • Net income improved from a $925,000 loss to $8.1 million of income, reflecting higher earned premiums, lower losses and interest expense, partly offset by higher acquisition and operating costs and lower investment income and gains.
  • Operating cash flow improved by $46.6 million to $38.6 million. Investing activities used $68.2 million, primarily as the company reinvested securities-sale proceeds; cash declined to $41.6 million from $71.6 million.
  • Gross unpaid-loss reserves declined to $33.6 million from $47.4 million, substantially reflecting the reduction in reinsurance recoverables after the 2005 Florida Hurricane Catastrophe Fund (FHCF) contract was commuted. Net reserves increased to $30.3 million from $23.6 million.
  • Investments increased to $124.3 million from $54.6 million, with fixed maturities making up most of the portfolio. The company repurchased 212,083 shares for $431,000 and paid a $0.05-per-share dividend.

Outlook, Risks, Contingencies and Unusual Items

  • Management said current resources and operating cash flows were expected to meet anticipated working-capital needs, but gave no quantified earnings or revenue guidance. No rate increases were pending at year-end. Rates implemented in 2011 were expected to continue affecting earned premiums through the fourth quarter of 2013.
  • Management expected to begin writing in Rhode Island in the first quarter of 2012; the state had authorized UPC, and the company had applications pending in two additional states.
  • Catastrophe exposure is a central risk. For the 2011–2012 program, the company retained the first $15 million of hurricane losses per event and the first $25 million of non-hurricane catastrophe losses per event, subject to its reinsurance arrangements. Losses beyond coverage remain the company’s responsibility, and the company remains liable to policyholders if reinsurers fail to pay.
  • Florida concentration, reserve-estimation uncertainty, reinsurance cost and collectability, rate-regulation limits, and reliance on two agency groups—which generated approximately 55% of direct premiums written—were significant risks. The company also cited dependence on third-party service providers and potential investment-market losses.
  • In June 2011, UIHC commuted its 2005 FHCF contract and received $12.738 million for outstanding Hurricane Wilma claims; the settlement generated $892,000 of additional prior-year catastrophe losses. The filing says subsequent 2005-contract losses beyond amounts reported at commutation would not be reimbursed by FHCF.
  • In February 2012, the Florida Office of Insurance Regulation determined that UPC and Kingsway Amigo Insurance Company and their affiliates were affiliated entities under common managerial control. UPC may not transfer assets to Kingsway or its affiliates without prior written approval.
  • CEO Donald Cronin planned to retire after the 2011 hurricane season or when a successor was identified; he began a temporary health-related leave in February 2012. The filing noted no detailed succession plan. The interim CFO and related advisory services were provided under an agreement with 1347 Advisors, a Kingsway affiliate, for a monthly fee of $60,000 plus expenses.
  • The Synovus lawsuit against UIHC and its affiliate was voluntarily dismissed without prejudice in January 2011; no reserve had been recorded. The independent auditor issued an unqualified opinion on the financial statements, and management reported effective disclosure controls and internal control over financial reporting.

Important Facts for Investors to Verify

  1. Confirm the intended issuer: this source filing is for United Insurance Holdings Corp., not American Coastal Insurance Corp.
  2. Review the full reinsurance terms, coverage limits, retentions, reinstatement provisions, and credit quality of reinsurers, including the consequences of the FHCF commutation.
  3. Assess the durability of favorable prior-year loss development and the adequacy of reserves, especially given the decline in gross reserves and reinsurance recoverables.
  4. Verify Florida’s continuing share of premiums, concentration in two agency groups, and progress and economics of expansion into other states.
  5. Monitor statutory capital, dividend restrictions, Florida SBA note covenants, and any regulatory consequences of the OIR affiliation determination.
  6. Review CEO succession, the related-party 1347 Advisors agreement and HRM investment, and the company’s ability to sustain dividends and liquidity through catastrophe losses.