AMERICAN COASTAL INSURANCE Corp quarterly report, Q2 FY2016

Business context and reporting period

This is United Insurance Holdings Corp.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The filing identifies the business as UPC Insurance, a property and casualty insurer focused primarily on homeowners’ coverage across multiple U.S. states. The filing registrant is United Insurance Holdings Corp., not American Coastal Insurance Corp.; investors should verify the requested company identity.

Financial performance and condition

Amounts below are in millions of dollars unless otherwise stated.

• Premium growth reflected expansion outside Florida; policies in force rose 45.2% year over year to 414,308 at June 30.
• Net loss ratios improved to 54.8% for Q2 and 58.9% for the first half, while underlying loss ratios worsened year over year, which management attributed primarily to greater weather-related claim frequency. The underlying combined ratio is a non-GAAP measure.
• Investment income was $2.7 million in Q2 and $5.1 million for the first half. First-half net realized investment gains were $0.4 million, versus a small loss in the comparable period.
• Operating cash flow was $52.5 million for the first half, compared with $53.4 million in 2015. Cash and cash equivalents were $136.2 million; investments were $499.2 million, for combined cash and investments of $635.4 million.
• Total assets were $996.8 million and stockholders’ equity was $259.2 million at June 30. Book value per share was $11.97, up 7.7% from year-end 2015.
• Notes payable totaled $25.5 million, including an $8.6 million acquisition note and a $5.2 million BB&T term note. The company reported compliance with debt covenants.

Material changes versus prior periods

• Net income increased 86.6% in Q2 and 133.7% for the first six months, supported by higher earned premiums, a lower ceding ratio and improved expense ratios.
• First-half gross written premiums grew 28.8%. General and administrative costs increased to $19.4 million from $13.9 million, attributed to staffing and higher depreciation and amortization; operating expenses also rose with technology investment.
• On April 29, 2016, the company acquired Interboro Insurance Company for stated consideration of $60.5 million, including cash, a note and an accrued amount. Interboro’s results were consolidated from the acquisition date. Preliminary goodwill recorded for the acquisition was $12.1 million.
• Accumulated other comprehensive income rose to $10.0 million from $1.6 million at year-end, reflecting unrealized investment gains.

Outlook, risks and unusual items

• Management said it expects gross written premium growth to continue through growth in existing markets and expansion into states where it is licensed. The filing provides no specific earnings or EPS guidance.
• The 2016–17 catastrophe reinsurance program provides stated protection of approximately $1.515 billion excess of $10 million; estimated program cost is $191.5 million. Management described coverage for major catastrophe events, but reinsurance does not eliminate exposure if counterparties fail to pay.
• Management cited weather and catastrophe exposure, reinsurance cost and availability, regulation, competition, investment-market risk, ratings downgrades and litigation outcomes as risks. The company reported no material changes to its stated risk factors and no off-balance-sheet arrangements.
• First-half catastrophe losses net of reinsurance were $18.8 million, versus $21.8 million a year earlier. Prior-year reserve development was unfavorable by $3.7 million, versus favorable development of $0.3 million in 2015.
• UPC reported statutory net losses of $9.3 million for the first half, despite consolidated GAAP net income; statutory results and capital requirements are distinct from consolidated GAAP results. The insurance affiliates reported meeting applicable regulatory requirements.
• The filing reported no material legal proceedings under Part II, while noting ordinary-course claims-related legal actions and the estimation uncertainty of loss reserves. A $0.06-per-share quarterly dividend was declared after quarter-end, payable August 31, 2016.

Important facts for investors to verify

1. Confirm whether United Insurance Holdings Corp. is the intended issuer, given the request names American Coastal Insurance Corp.
2. Review Interboro’s final purchase-price allocation and its ongoing contribution to consolidated premiums, earnings and reserves.
3. Assess loss-reserve adequacy, adverse reserve development and the increase in underlying loss ratios, particularly weather-related claim frequency.
4. Evaluate the cost, limits, attachment terms and counterparty security of catastrophe reinsurance, along with exposure to multiple or severe events.
5. Monitor statutory capital, dividend restrictions, debt covenants and the company’s liquidity needs as premium volume grows.