Business context and reporting period
United Insurance Holdings Corp. (UIHC, operating as UPC Insurance) filed this unaudited Form 10-Q for the three months ended March 31, 2021. The filing is not from American Coastal Insurance Corp.; ACIC is one of UIHC’s insurance subsidiaries. UIHC writes residential personal and commercial property insurance, with substantial exposure in Florida and other coastal markets.
The company reported that policies in force fell 3.6% year over year to 605,753, following underwriting actions. Effective January 1, 2021, it no longer wrote business in Hawaii. A January 2021 renewal-rights transaction transferred rights to UPC’s personal homeowners business in Connecticut, Massachusetts, New Jersey and Rhode Island to HCI, subject to regulatory approval; related 69.5% quota-share reinsurance was scheduled to run through June 1, 2021.
Financial results and condition
Unless noted otherwise, figures below are in millions of dollars. The filing’s financial tables are presented in thousands.
| Metric | Q1 2021 | Q1 2020 or comparison |
|---|---|---|
| Gross premiums written | $311.6 | $335.2; down 7.0% |
| Net premiums earned | $145.9 | $191.6; down 23.8% |
| Total revenue | $161.8 | $176.3 |
| Net loss attributable to UIHC | $(17.8) | $(12.7) |
| Loss per diluted share | $(0.41) | $(0.30) |
| Operating cash flow | $(66.7) | $17.5 |
| Cash, cash equivalents and restricted cash at March 31 | $272.6 | $301.5 at Dec. 31, 2020 |
| Stockholders’ equity | $379.9 | $417.6 at Dec. 31, 2020 |
The net loss reflected lower net premiums earned, higher ceded premiums and higher losses. Net investment income declined to $3.6 million from $6.9 million. Equity securities produced a $2.6 million unrealized gain, compared with a $26.5 million unrealized loss in Q1 2020; total comprehensive loss was $35.3 million.
The net loss ratio was 79.3% versus 53.7%; the expense ratio was 47.9% versus 45.3%; and the combined ratio was 127.2% versus 99.0%. The company’s non-GAAP underlying combined ratio, excluding current-year catastrophe losses and prior-year reserve development, was 90.4% versus 90.7%. Current-year catastrophe losses were $24.0 million, or 16.4 combined-ratio points, compared with $17.1 million and 8.9 points a year earlier. Prior-year adverse development was $29.8 million, or 20.4 points, compared with favorable development of $1.1 million in Q1 2020.
At March 31, total assets were $2.80 billion and total liabilities were $2.42 billion. Unpaid losses and loss adjustment expenses were $1.22 billion, including $785.3 million of IBNR reserves. Reinsurance recoverables were $956.1 million. Investments were $936.8 million. Notes payable, net, were $157.5 million on the balance sheet; the debt note reports total debt of $159.7 million before debt issuance costs, including $150 million of senior notes due 2027. The company used $41.0 million of cash in investing activities, mainly reflecting net investment sales, and paid $2.6 million in dividends.
Material changes, outlook and risks
- Management attributed the deterioration in reported underwriting results to Winter Storm Uri, increased Florida litigation-related claims and reserve strengthening, alongside higher reinsurance costs. Prior-year reserve strengthening was $29.8 million.
- Gross written premiums fell mainly because assumed commercial property premiums declined by $19.1 million following termination of a contract. Direct written premiums also declined by $4.5 million.
- Ceded premiums earned rose to $210.7 million from $153.0 million. The total ceding ratio increased to 59.1% from 44.4%, reflecting changes to quota-share and catastrophe reinsurance arrangements. The company recorded $15.1 million of reinstatement premiums related to its all-other-perils treaty following Winter Storm Uri.
- Statutory surplus of regulated entities was $330.5 million, down from $370.7 million at year-end. Combined statutory results were a $44.0 million loss, versus $7.2 million of income in Q1 2020. UIHC said subsidiaries met regulatory capital requirements at quarter-end.
- Management gave no quantified earnings, premium or combined-ratio guidance. It said current capital resources and operating cash flows were expected to meet anticipated working-capital needs, while noting that future COVID-19 effects were uncertain. The company reported no material COVID-related operating or liquidity impact in the quarter.
- Key risks include catastrophe severity and concentration in Florida and other coastal states; loss-reserve uncertainty and Florida litigation trends; the cost, availability and collectability of reinsurance; and constrained subsidiary dividends. Reinsurers’ obligations do not remove UIHC’s primary responsibility to policyholders.
- UIHC was not in compliance with the Truist loan’s minimum cash-flow coverage covenant at the December 31, 2020 annual test and obtained a waiver for that period. It reported compliance with the other specified debt covenants at March 31, 2021. Routine claims-related litigation was ongoing; the company reported no material non-claims-related legal actions.
Important facts for investors to verify
- How claims emergence and subsequent actuarial reviews affect the $29.8 million adverse prior-year development and the $1.22 billion loss reserve, particularly IBNR.
- Whether reinsurance recoveries are collected as expected and how treaty renewals, ceding costs and the HCI quota-share arrangement affect net premiums and catastrophe protection.
- Whether the company’s statutory surplus and subsidiary capital remain adequate after the quarterly statutory loss, and what constraints apply to dividends to the holding company.
- Whether the Truist covenant waiver or future covenant testing creates additional liquidity, collateral or repayment risk.
- How sustainable the 90.4% underlying combined ratio is, given the substantially higher reported combined ratio and the non-GAAP exclusions used to calculate the underlying measure.