Business context and reporting period
United Insurance Holdings Corp. (which describes UPC Insurance as its preferred brand) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. It is a property and casualty insurance holding company, principally writing homeowners’ insurance through subsidiaries in Florida, Massachusetts, North Carolina, Rhode Island, and South Carolina. It received authorization to write in New Hampshire, New Jersey, and Texas in April 2013. Figures below are in thousands of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $48,652 | $31,564 | $92,822 | $61,067 |
| Net premiums earned | $45,971 | $29,722 | $88,268 | $57,512 |
| Net income | $4,509 | $2,991 | $8,860 | $7,739 |
| Diluted EPS | $0.28 | $0.29 | $0.55 | $0.75 |
| Combined ratio | 89.8% | 87.1% | 88.7% | 83.2% |
| Underlying combined ratio (non-GAAP) | 82.0% | 88.3% | 80.6% | 84.2% |
- Gross premiums written increased 33% to $103,303 in Q2 and 41% to $191,049 for the first half. Management attributed growth to more new and renewal policies, including 15,133 policies assumed from Citizens Property Insurance Corporation in January.
- Loss and loss-adjustment expenses were $23,007 in Q2 and $43,554 for the first half. The reported loss ratio was 50.0% for Q2 and 49.3% for the first half. First-half prior-year development included $860 from lines in run-off and $2,654 of reserve development; the comparable 2012 period had favorable reserve development.
- Cash from operating activities was $70,309 for the first half, versus $53,260 in 2012. Investing activities used $94,706, mainly reflecting investment purchases; financing activities provided $4,007. Cash and cash equivalents were $50,815 at June 30, down from $71,205 at year-end.
- At June 30, total investments were $241,963 and cash plus investments were $292,778. Total assets were $467,139; total liabilities were $370,207; stockholders’ equity was $96,932.
- Notes payable were $15,294, down from $15,882 at year-end; the variable interest rate was 1.87%. The company reported compliance with the note’s covenants and insurance regulatory requirements. Its insurance affiliate reported statutory surplus of $70,954.
- Net investment income was $831 for Q2 and $1,555 for the first half. Realized investment losses were $149 and $161, respectively. Accumulated other comprehensive income declined to $24 from $2,613 at year-end, primarily reflecting unrealized investment losses as interest rates rose.
Material changes and management commentary
- Q2 revenue rose 54% and net income rose 51% year over year; first-half revenue rose 52% and net income rose 14%. Diluted EPS fell year over year in both periods, with weighted-average shares increasing from about 10.4 million to about 16.1 million.
- The Q2 combined ratio worsened by 2.7 percentage points, while the underlying combined ratio improved by 6.3 points. For the first half, the combined ratio worsened by 5.5 points, while the underlying ratio improved by 3.6 points. Management cited catastrophe claims, prior-year reserve development, and higher underlying loss costs; growth-related expenses also increased.
- Q2 catastrophe losses were $1,777, including losses associated with Winter Storm Nemo, an Orlando severe-thunderstorm event, and Tropical Storm Andrea. First-half catastrophe losses were $3,595, including first-quarter fire and sinkhole losses.
- The company placed its 2013–14 catastrophe reinsurance program effective June 1, including Florida Hurricane Catastrophe Fund coverage and private reinsurance layers. Management expects premium growth to continue through expansion in existing markets and entry into the three newly authorized states. No quantitative earnings or revenue guidance was provided.
Outlook, risks, and contingencies
Management said current capital resources and operating cash flows should be sufficient for anticipated working-capital needs, but gave no assurance this will hold in the future. Key risks include catastrophe severity and frequency, reinsurance cost and availability, reserve estimation, regulatory changes and restrictions on insurer dividends, competition, investment-market movements, litigation, and financial-strength rating downgrades. The filing reports ordinary-course claims-related litigation; no clear quantified litigation contingency is provided. The company reported no off-balance-sheet arrangements and no material changes to the risk factors in its 2012 Form 10-K. It declared a $0.03-per-share quarterly dividend payable in September 2013.
Important facts for investors to verify
- Whether growth in policies and premiums in new and existing states can be maintained without weakening underwriting profitability.
- The drivers and persistence of prior-year reserve development and elevated losses, including losses from catastrophe and non-catastrophe events.
- The adequacy, terms, and actual recoverability of the 2013–14 reinsurance program, including any FHCF adjustments based on exposure data.
- Investment portfolio exposure to rising rates and credit-market changes, and the resulting effect on fair value, comprehensive income, and book value.
- Liquidity and capital at the insurance-subsidiary level, including regulatory limits on transfers to the holding company and compliance with debt covenants.