United Insurance Holdings Corp. (UIHC): Compelling High-Risk Insurer with Favorable Industry Dynamics and Big Expansion Plans
United Insurance Holdings Corp. (UIHC) is the holding company for United Property & Casualty Insurance Company (UPC Insurance) and its affiliates, and has built a strong and rapidly expanding niche in high-risk homeowners’ property and casualty insurance for underserved areas susceptible to natural catastrophes. The company currently has operations in North and South Carolina, Florida, Massachusetts and Rhode Island – where larger insurers have reduced their presence, thereby creating opportunity for UPC.
Share Could Rise from $18.25 to $65 Over Next 5 years
With per-share earnings growth of 20%, FastGraphs expects shares to rise to $65 over the next five years, up from $18.25 (as of June 6, 2014) for about a 29% estimated total annual return.
Record Q1 Earnings Growth, Solid Margins, Low Leverage, Compelling Valuation
For its first quarter ended March 31, 2014, UPC had $95 million in gross premiums earned, up 36% over the year-ago quarter. 57% of its new policies were outside Florida, suggesting good geographic diversification results with over 100% growth (in direct written premiums) in Massachusetts, Rhode Island, North Carolina, New Jersey and Texas.
Total revenues were up 52.8% to $67.5 million and net income rose 162% to $11.4 million ($0.65 per share), with quarter-end book value of $8.33 per share (up 26% from $57.5 million raised in March and growth in net income) and 25% return on average equity.
The market has recognized the company’s potential and shares are up 181% over the past twelve months to $18.25 (as of June 6, 2014). The company has a market capitalization of $380 million and is valued at 11x TTM earnings, in line with its peers. UPC’s operating margin suggests its better at controlling expenses than 76% of its peers, and its low debt ratios indicate that it has been less aggressive with using debt to finance growth than 90% of its peers in the property and casualty industry, resulting in less volatility in future earnings.
UPC started operations in Florida in 1999 and has successfully managed its business through various hurricane and tropical storm events. Its track record of successfully managing risk in catastrophe-prone areas gives UPC a competitive advantage as it expands into additional states that also experience capricious weather, floods, earthquakes or other natural disasters.
Dividends – $0.16 Annualized, 0.90% Yield
UPC recently paid a quarterly cash dividend of $0.04 per share (on May 23, 2014) for a dividend yield of 0.90% with shares trading at $18.05 (as of June 7, 2014).
Strong Underlying Fundamentals
Strong Financial Performance
UPC Insurance has a strong financial record and has been profitable in 14 of the 15 years it has been in business. In 2013, the company underwrote $381.4 million and generated $20.3 million in net income, with a 20.8% return on average equity despite nearly $8 million of catastrophe and development expense.
In 2013, UPC achieved 46.7% year-over-year GPE (gross premiums earned) growth and 49.6% PIF growth, both of which underscore strong market expansion under a favorable regulatory and competitive environment.
The company’s business success is also underscored by 90%+ renewal retention rates despite significant increase in premiums. Over the past three years, UPC has steadily increased total insured value and policies in-force (PIF), while steadily reducing its average annual loss relative to PIF from 26% in 2009 to about 15% in 2013.
97% of the company’s 2013 premiums are from homeowners, with fire bringing in 3%. And 80% of the company’s 2013 policies in-force (PIF) were in its original state of Florida but it is rapidly expanding into new geographies; On PIF, Florida is down from 84% in 2012. At year-end 2013, the company had $380.7 million in total premium in-force and $202.5 million in total policies in-force.
Compelling Market Opportunity
UPC’s focus on catastrophe insurance in areas prone to natural disasters creates a compelling growth opportunity; especially as major national carriers exit such high-risk areas. While UPC is ranked among Florida’s Top 10 insurers, and ranked 48th nationwide, it is rapidly gaining share with homeowner’s insurance in the regions it serves.
Beyond its five-state presence, UPC plans to expand into the coastal states of Texas, New Jersey and New Hampshire, and extend into southern Gulf coast states and states along the east coast, with huge regional growth potential. Over the next five years, the company expects to reduce Florida’s predominance to 55%, with a longer-term target of 20% for Florida and 80% for its other coastal states.
Proven Access to Capital
UPC is a public company and can access public and private equity and debt capital markets for additional capital as needed. The company has a strong balance sheet and is well capitalized for planned growth.
Exceptional Management Team with Deep High-Risk-Insurance Experience
UPC has a strong and experienced management team augmented by a deeply experienced Board, and executive compensation plans are well aligned with risk-adjusted performance.
The company is headed by Gregory Branch who has served as Chairman since the company’s founding in 1999. Branch has extensive insurance industry experience and was a Member of Lloyd’s of London for over 20 years.
John Forney serves as President and CEO, and joined the company after a highly successful investment banking career where he focused on the insurance sector and catastrophe risk management advisory. Bradford Martz serves as CFO and brings 20 years of relevant experience to the company. Andrew Swenson serves as CIO, an increasingly responsible position as technology becomes ever-central to what the company does.
Unique Insurance Capabilities Drive Policy Growth
UPC has unique insurance capabilities that focus on risk selection and management, and sophisticated catastrophe modeling. The company effectively leverages technology and the Internet to drive underwriting and agency systems to improve efficiency and productivity while driving down expenses. UPC manages risk of catastrophic loss through sophisticated pricing algorithms, avoidance of policy concentration and the use of a comprehensive catastrophe reinsurance program.
Solid Growth Strategy
UPC plans to grow selectively in target markets by building a superior team of insurance professionals that can provide quality homeowners’ insurance products with world-class service and systems; by raising and managing capital to support business growth; and by building and maintaining relationships with complementary external partners.
The company has five key growth strategies. It has strengthened its leadership team to capitalize on expansion opportunities in Gulf Coast and Eastern Seaboard states, and hired six senior officers, each with large company, multi-state experience, over the past 18 months.
It plans on geographic diversification to capitalize on a ready market opportunity, and expects to reduce Florida’s share of its total business from 80% in 2014 to about 55% over the next five years. Geographic diversification will also help the company minimize policy concentration and reduce peak exposure.
UPC’s profitable expansion will depend on a strong capital position to protect its business against severe catastrophic events. In March 2014, UPC completed a $57.5 million follow-on equity offering (selling 4.6 million shares at $12.50 each) that will add to cash and help maintain risk metrics at target levels. Through its reinsurance division, UPC plans to enhance catastrophe reinsurance protection against frequency and severity of unfavorable disasters or claims.
As it enters new territories, UPC plans to differentiate itself on service to win agent and customer loyalty by increasing in-house claims adjudication capabilities, leveraging technology and transitioning away from a BPO (call center) model to a Blue-Label Service.
And to remain profitable, it has developed an in-house culture of risk management with proprietary in-house risk scoring and exposure modeling, and a product management model with increased accountability for results.
Operational Excellence Drives Profits, Expedites Claims, Minimizes Risk
UPC has built a strong marketing presence with a growing network of independent agent distribution channels and aggregator relationships (Allstate and FAIA), regional and state marketing directors with strong agency relationships and extensive local market knowledge, strategic partnerships with established carriers to bundle products, and a strong rolling 12-month production average of over 5,500 policies per month.
The company’s success and profitability is significantly driven by skilled risk management with a conservative underwriting culture that prioritizes selection of the right risks at the right rate, front-end portfolio optimization tools to manage risk concentration and spread risk, sophisticated in-house modeling with a focus on data quality and an evolving enterprise risk management platform with policy profitability analysis.
UPC also has experienced claims management with capacity to handle large claim volumes expeditiously each year.
Favorable Regulatory and Political Environment
UPC faces a favorable regulatory environment for homeowner carriers with continued de-concentration and optimization fueling market in many catastrophe-exposed areas, the Florida market softening due to lower reinsurance and loss costs as well as several years of rate increases, market fragmentation that supports UPC’s ability to achieve its desired spread of risk, improving rate adequacy in most states counterbalanced by affordability constraints. Catastrophe claims experience is critical as service standards are increasingly tightened and regulated, and this bodes well for UPC.
UPC has also benefited from competitors’ emphasis on depopulation of residual markets where exposure growth is generally viewed as a serious financial threat in many states and this “keep out” strategy could help UPC achieve balanced growth in Florida, Texas, North Carolina and elsewhere. In addition, good risks can inadvertently land in residual markets which allows for opportunistic assumption or takeout of policies that improve overall portfolio risk metrics.
The industry’s growing acceptance of rate-to-risk methods increases flexibility of coverage and form changes to help control loss costs through expanded use of model-based rating for expected losses using distance-to-coast factors.
Vertically-Integrated Holding Structure
United Insurance Holdings Corp. is the holding company for four wholly-owned subsidiaries that collectively go by the name of UPC Insurance. These subsidiaries include United Property & Casualty Insurance Company (main insurance arm that underwrites policies), United Insurance Management (provides administrative services to group companies), Skyway Claims (provides field inspection services for non-catastrophic claims) and UPC Re (Reinsurance subsidiary that helps manage risk).
Sunshine Acquisition Terminated
In May 2014, UPC announced that it terminated its non-binding letter of intent regarding the proposed acquisition of 100% of Sunshine State Insurance, a Florida domiciled property and casualty insurance company. The cancellation is in the best interest of shareholders, and UPC will continue to look for complementary acquisition opportunities where the price is right.
Impressive Q1 2014 Results; Net Income Up 162%
For its first quarter ended March 31, 2014, UPC had $95 million in gross premiums earned, up 36% over the year-ago quarter. As a result, total revenues were up 52.8% to $67.5 million and net income rose 162% to $11.4 million ($0.65 per share, up 141%), with quarter-end book value of $8.33 per share and a 25% return on average equity.
The company also reduced its loss ratio by 5.4% and its expense ratio by 4.5%.
At quarter end, UPC had cash of $57 million (including proceeds from its March 2014 equity offering), total assets of $485 million and $14.4 million in debt (well below its peers).
UPC’s cash and investment holdings totaled $395.0 million at March 31, 2014, and primarily consisted of investments in high-quality money market instruments, U.S. Government and agency securities and high-quality corporate debt.
United Insurance Holdings Corp. (UIHC) has delivered solid results since inception and shareholders have done very well since the company went public. Shares could move from their $18 levels to over $65 in five years, offering significant capital appreciation upside. In addition, the company pays a dividend, which it likely will raise every year. Macro property and casualty insurance trends appear favorable and the company’s growth plans offer tremendous upside potential. Shares are reasonably valued at current levels and offer sizable upside. Near-term dips on profit taking (after a year of stellar gains) would be solid buying opportunities.