United Insurance Holdings Corp. (UIHC) — 2017 Form 10-K
Issuer and period: This filing is for United Insurance Holdings Corp. for the fiscal year ended December 31, 2017. The request identifies American Coastal Insurance Corp.; the filing instead identifies United Insurance Holdings Corp. and describes American Coastal Insurance Company (ACIC) as a subsidiary. Verify the intended issuer.
Business context
UIHC is a property and casualty insurance holding company focused on residential and commercial property insurance in catastrophe-exposed U.S. markets. It operated through four insurance subsidiaries and reported one business segment. About 41% of policies in force were in Florida at year-end. The April 2017 acquisition of AmCo added substantial commercial residential business and was funded with 20.96 million UIHC shares.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Gross premiums written | $1,040.8 million | $708.2 million |
| Net premiums earned | $585.5 million | $456.9 million |
| Total revenue | $654.4 million | $487.1 million |
| Net income | $10.1 million | $5.7 million |
| Diluted earnings per share | $0.27 | $0.26 |
| Combined ratio | 111.1% | 104.9% |
| Underlying combined ratio | 85.4% | 87.5% |
| Operating cash flow | $14.3 million | $65.7 million |
| Cash and investments | $1,130.8 million | $679.3 million |
| Total assets | $2,059.9 million | $999.7 million |
| Notes payable, net | $161.4 million | $54.2 million |
| Stockholders’ equity | $537.1 million | $241.3 million |
Amounts are rounded; financial statement figures are presented in thousands in the filing. Net income rose despite a small pretax profit because the company recorded a $9.2 million income tax benefit, including a $6.8 million benefit from revaluing deferred taxes after the federal corporate tax rate fell to 21%. The combined ratio above 100% indicates an underwriting loss on the reported measure; the underlying ratio is a company-defined non-GAAP measure and excludes specified catastrophe, reserve-development and ceding-commission effects.
Changes, unusual items and outlook
- Gross written premiums increased 47%, primarily due to the AmCo acquisition and organic growth in Gulf and Northeast markets. Policies in force increased 17.1% to 528,193.
- Commercial property rose to 23% of the product mix from 3% in 2016. AmCo contributed $134.4 million of revenue and $12.6 million of pretax income from its acquisition date through year-end.
- Hurricanes Harvey and Irma contributed to $116.4 million of current-year catastrophe losses incurred net of reinsurance; management reported $83 million of retained pretax catastrophe losses net of reinsurance recoverable. Catastrophes added 19.8 percentage points to the combined ratio.
- Net loss and loss-adjustment expenses were $365.5 million, while favorable prior-year reserve development was $2.6 million. Gross unpaid losses and LAE increased to $482.2 million, with $305.7 million of unpaid losses recoverable from reinsurers.
- Reinsurance expense increased: ceded premiums earned were $400.5 million versus $209.9 million, and the ceded ratio rose to 40.6% from 31.5%. The company reported $2.7475 billion of catastrophe reinsurance protection for the June 2017–May 2018 program year and renewed a 20% quota-share treaty effective December 31, 2017.
- In December, UIHC issued $150 million of 6.25% senior unsecured notes due 2027. Total debt increased; the company reported compliance with its covenants at year-end. Management said capital resources and operating cash flows were expected to meet currently anticipated working-capital needs.
- Management expected gross written premium growth to continue as it grew in current markets and considered expansion into other licensed states; the filing gives no quantified earnings or premium guidance.
- Quarterly results were volatile: the third quarter recorded a $28.0 million net loss, followed by $27.0 million net income in the fourth quarter. Full-year operating cash flow fell to $14.3 million, and the filing anticipated substantial claims payments and related reinsurance recoveries following the hurricanes.
Risks, controls and contingencies
- Catastrophe exposure, Florida concentration, loss-reserve estimation, reinsurance availability and collectability, investment-market risk, regulatory constraints, and insurance pricing cycles are significant risks. AmRisc is an important managing general agent for ACIC’s commercial business; the filing describes concentration and contract-renewal risks.
- Insurance subsidiaries reported year-end risk-based capital ratios of 308% for UPC, 633% for ACIC, 504% for FSIC and 924% for IIC, above minimum requirements. Subsidiary dividends are subject to regulatory restrictions, which can constrain holding-company liquidity.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2017 due to material weaknesses involving oversight of third-party service-provider controls and accounting procedures for taxes, acquisitions and investments. The auditor also issued an adverse opinion on internal control. The financial-statement audit opinion was unqualified. AmCo, representing approximately 36% of assets and 146% of net income, was excluded from the control assessment.
- The company reported no material non-claims-related legal proceedings and no off-balance-sheet arrangements. Ordinary-course claims litigation remains possible; the filing does not provide a clear quantified value for those contingencies.
- Related-party disclosures include AmRisc, whose CEO and approximately 7.7% owner was UIHC Vice Chairman R. Daniel Peed; UIHC reported $60.0 million of AmRisc fees and commissions for 2017.
Most important facts for investors to verify
- Whether the intended filing is UIHC’s 10-K or a filing for American Coastal Insurance Corp.; ACIC appears here as a subsidiary, not the registrant.
- Progress in remediating the disclosed material weaknesses, particularly controls over third-party systems, acquisition accounting, income taxes and investment reporting.
- Ultimate retained losses, reserve adequacy and timing or collectability of the $395.8 million total reinsurance recoverable at year-end.
- Post-acquisition profitability and integration costs, including the effects of AmCo’s contribution and the substantial share issuance.
- Future reinsurance pricing, limits, retentions and counterparty quality, as well as holding-company liquidity under restrictions on subsidiary dividends.
- Whether premium growth can translate into sustainable underwriting profitability after catastrophe losses, expenses and reinsurance costs.