United Insurance Holdings Corp. (NASDAQ:UIHC) (UPC Insurance or the Company), a property and casualty insurance holding company, today reported its financial results for the third quarter ended September 30, 2015.

($ in thousands, except per share and ratios)   Three Months Ended   Nine Months Ended
September 30, September 30,
2015   2014   Change 2015   2014   Change
Gross premiums written $ 155,985 $ 105,065

48.5

%

$ 425,183 $ 322,986

31.6

%

Gross premiums earned $ 128,733 $ 100,851

27.6

%

$ 364,897 $ 293,085

24.5

%

Ceded premiums earned $ (44,730 ) $ (35,741 )

25.2

%

$ (122,394 ) $ (99,757 )

22.7

%

Net premiums earned $ 84,003 $ 65,110

29.0

%

$ 242,503 $ 193,328

25.4

%

Total revenues $ 89,806 $ 68,847

30.4

%

$ 257,542 $ 204,058

26.2

%

Earnings before income tax $ 12,984 $ 13,523

(4.0)

%

$ 21,509 $ 46,629

(53.9)

%

Net income $ 8,083 $ 8,640

(6.4)

%

$ 13,556 $ 29,619

(54.2)

%

Net income per diluted share $ 0.38 $ 0.41

(7.3)

%

$ 0.63 $ 1.50

(58.0)

%

Book value per share $ 10.55 $ 9.16

15.2

%

Return on average equity, ttm 11.9 % 27.4 % (15.5 ) pts
Loss ratio, net1 48.1 % 46.3 % 1.8 pts 56.5 % 44.8 % 11.7 pts
Expense ratio, net2 43.4 % 38.5 % 4.9 pts 40.9 % 36.5 % 4.4 pts
Combined ratio (CR)3 91.5 % 84.8 % 6.7 pts 97.4 % 81.3 % 16.1 pts
Effect of current year catastrophe losses on CR 4.5 % 1.1 % 3.4 pts 10.6 % 0.5 % 10.1 pts
Effect of prior year (favorable) development on CR (1.3 )% (2.4 )% 1.1 pts (0.6 )% (1.4 )% 0.8 pts
Underlying combined ratio4 88.3 % 86.1 % 2.2 pts 87.4 % 82.2 % 5.2 pts
1   Loss ratio, net is calculated as losses and loss adjustment expenses (LAE) relative to net premiums earned.
2 Expense ratio, net is calculated as the sum of all operating expenses less interest expense relative to net premiums earned.
3 Combined ratio is the sum of the loss ratio, net and expense ratio, net.
4 Underlying combined ratio, a measure that is not based on U.S. generally accepted accounting principles (GAAP), is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this press release is in the "Definitions of Non-GAAP Measures" section of this document.
 

"The quarter was marked by excellent progress in all areas," said John Forney, President and Chief Executive Officer of UPC Insurance. "Organic growth and geographic diversification were the main top line themes, with record new business volume each month, over $500 million in premium in force at quarter's end, and 49% of our written premium coming from outside Florida. On the loss side, our non-cat loss ratio declined each month during the quarter, and as a result we produced our lowest non-cat loss ratio quarter of the year. Our efforts to build an enduring franchise built on a foundation of diversification, financial stability, sound products, and premier customer service are on track. I appreciate all the hard work our associates are doing every day to make our vision a reality."

Quarterly Financial Results

Net income for the quarter was $8.1 million, or $0.38 per diluted share, compared to $8.6 million, or $0.41 per diluted share for the third quarter of 2014. The decrease in net income was primarily due to increases in losses and loss adjustment expenses (LAE) resulting from multiple catastrophe events totaling $3.8 million, or $0.11 per diluted share, and higher operating expenses which were partially offset by strong revenue growth of 30.4% and favorable reserve development of $1.1 million, or $0.04 per diluted share.

The Company's total gross written premium increased by $50.9 million, or 48.5%, primarily due to the strong organic growth in new and renewal business generated in all states outside of Florida. The Company's growth in gross written premium in Louisiana continued to benefit from the acquisition of Family Security Holdings, LLC, which closed in the first quarter of 2015. The breakdown of the quarter-over-quarter changes in both written and assumed premiums by state is shown in the table below.

 

Three Months Ended

    

September 30,

Direct Written and Assumed Premium By State 2015   2014 Change Growth %
Direct written premium
Florida $ 77,732 $ 71,270 $ 6,462 9.1 %
Texas 20,725 4,802 15,923 331.6
Louisiana 11,472 — 11,472 100.0
Massachusetts 11,150 8,759 2,391 27.3
South Carolina 11,129 8,969 2,160 24.1
North Carolina 8,372 4,493 3,879 86.3
Rhode Island 7,207 5,589 1,618 28.9
New Jersey 3,309 1,316 1,993 151.4
Georgia 83   —   83   100.0  
Total direct written premium by state 151,179 105,198 45,981 43.7
Assumed premium (1) 4,806   (133 ) 4,939   3,713.5  
Total gross written premium $ 155,985     $ 105,065     $ 50,920     48.5 %
1   All assumed premiums are written in Florida due to policy assumptions from Citizens Property Insurance Corporation.
 

Loss and LAE increased $10.3 million, or 34.1%, to $40.4 million for the third quarter of 2015 from $30.1 million for the third quarter of 2014. Loss and LAE expense as a percentage of net earned premiums increased 1.8 points resulting in a net loss ratio of 48.1% for the quarter, compared to a net loss ratio of 46.3% for the same period last year. Excluding catastrophe losses and reserve development, the Company's gross underlying loss and LAE ratio for the quarter was 29.3%, a decrease of 1.4 points from 30.7% during the third quarter of 2014.

UPC Insurance experienced $3.8 million of net catastrophe losses during the quarter, which included $2.4 million of new losses from an August windstorm event in the Northeastern U.S. that was fully retained by the Company as well as $1.4 million of development, net of all reinsurance recoveries, on catastrophe losses previously incurred and reported during 2015.

Policy acquisition costs increased $6.5 million, or 37.4%, to $23.8 million for the third quarter of 2015 from $17.3 million for the third quarter of 2014. These costs vary directly with changes in gross premiums earned and were generally consistent with the Company's growth in premium production and higher average commission rates outside of Florida.

Operating expenses increased to $4.3 million or 40.3% for the third quarter of 2015, from $3.1 million during the same period of last year due to higher underwriting report costs, licensing costs and marketing costs resulting from the Company's continued growth of policies in-force and expansion into new states.

General and administrative expenses increased to $8.3 million for the third quarter of 2015, from $4.7 million for the third quarter of 2014 primarily due to increases in personnel costs, information technology investments and professional services related to the Company's continued growth. Approximately $1.1 million of general and administrative expense for the third quarter of 2015 was driven by non-recurring charges for legal fees.

Combined Ratio Analysis

The Company's GAAP net combined ratio increased 6.7 points to 91.5% for the three months ended September 30, 2015 compared to 84.8% for the same period in 2014. The net combined ratio increase was caused by 4.5 points, or $3.8 million of non-recurring catastrophe losses and higher operating expenses which were partially offset by lower non-catastrophe loss costs. The Company’s underlying net combined ratio, which excludes losses from catastrophes and all effects of reserve development, increased 2.2 points to 88.3% for the third quarter of 2015 compared to 86.1% for the same period in 2014. Operating expenses contributed 4.9 points of the increase which was partially offset by the lower underlying loss and LAE of 2.7 points. Approximately 68% of the $11.3 million operating expense increase was driven by policy acquisition costs and underwriting expenses that mostly vary directly with premiums which also grew proportionally from the same period in 2014.

The calculation of the Company's underlying loss and combined ratios is shown below.

($ in thousands except ratios)   Three Months Ended   Nine Months Ended
September 30, September 30,
2015   2014   Change 2015   2014   Change
Loss and LAE $ 40,432 $ 30,140 $ 10,292 $ 137,030 $ 86,605 $ 50,425
% of Gross earned premiums 31.4 % 29.9 % 1.5 pts 37.6 % 29.5 % 8.1 pts
% of Net earned premiums 48.1 % 46.3 % 1.8 pts 56.5 % 44.8 % 11.7 pts
Less:
Current year catastrophe losses $ 3,808 $ 714 $ 3,094 $ 25,585 974 $ 24,611
Prior year reserve (favorable) development (1,059 ) (1,543 ) 484   (1,365 ) (2,708 ) 1,343  
Underlying Loss and LAE* $ 37,683 $ 30,969 $ 6,714 $ 112,810 $ 88,339 $ 24,471
% of Gross earned premiums 29.3 % 30.7 % (1.4 ) pts 30.9 % 30.1 % 0.8 pts
% of Net earned premiums 44.9 % 47.6 % (2.7 ) pts 46.5 % 45.7 % 0.8 pts
Policy acquisition costs $ 23,756 $ 17,291 $ 6,465 $ 64,140 $ 48,668 $ 15,472
Operating and underwriting 4,329 3,086 1,243 12,679 8,453 4,226
General and administrative 8,331   4,709   3,622   22,244   13,394   8,850  
Total Operating Expenses $ 36,416 $ 25,086 $ 11,330 $ 99,063 $ 70,515 $ 28,548
% of Gross earned premiums 28.3 % 24.9 % 3.4 pts 27.1 % 24.1 % 3.0 pts
% of Net earned premiums 43.4 % 38.5 % 4.9 pts 40.9 % 36.5 % 4.4 pts
Combined Ratio - as % of gross earned premiums 59.7 % 54.8 % 4.9 pts 64.7 % 53.6 % 11.1 pts
Underlying Combined Ratio - as % of gross earned premiums 57.6 % 55.6 % 2.0 pts 58.0 % 54.2 % 3.8 pts
Combined Ratio - as % of net earned premiums 91.5 % 84.8 % 6.7 pts 97.4 % 81.3 % 16.1 pts
Underlying Combined Ratio - as % of net earned premiums 88.3 % 86.1 % 2.2 pts 87.4 % 82.2 % 5.2 pts
*  

Underlying Loss and LAE is a non-GAAP financial measure and is reconciled above to Net Loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this press release is in the "Definitions of Non-GAAP Measures" section of this document.

 

The Company’s gross underlying loss ratio for the third quarter of 2015 decreased to 29.3% compared to 30.7% in the third quarter of 2014. This decrease was driven primarily by continued improvement in severity across most states and causes of loss as well as lower frequency of water and fire losses compared to the same period a year ago. The Company's net underlying loss ratio also decreased from 47.6% for 2014 to 44.9% for 2015.

Reinsurance Costs Decreased as a % of Earned Premium for the Quarter and Year-to-Date

Excluding the Company's flood business, for which it cedes 100% of the risk of loss, reinsurance costs in the third quarter of 2015 were 31.8% of gross premiums earned compared to 32.1% of gross premiums earned for the third quarter of 2014. Reinsurance costs for the nine months ended September 30, 2015 were 30.5% of gross premiums earned compared to 30.8% for the same period last year.

Investment Portfolio Highlights

UPC Insurance's cash and investment holdings totaled $530.1 million at September 30, 2015 compared to $443.0 million at December 31, 2014. UPC Insurance's cash and investment holdings consist of investments in U.S. Government and agency securities, corporate debt and 100% investment grade money market instruments. Fixed maturities represented approximately 93.9% of total investments at September 30, 2015 with a modified duration of 3.8 years compared to 92.4% at December 31, 2014 and a modified duration of 3.8 years.

Book Value Analysis

Book value per share increased 8.2% from $9.75 at December 31, 2014, to $10.55 at September 30, 2015 and underlying book value per share increased 9.0% from $9.56 at December 31, 2014 to $10.42 at September 30, 2015. The increase in the Company's book value per share and underlying book value per share was driven by the increase in equity from the acquisition of Family Security Holdings, LLC and retained earnings during 2015. The Company's underlying book value per share growth was impacted by the increase in accumulated other comprehensive income as shown in the table below.

($ in thousands, except for per share data)   September 30,   December 31,
2015

2014

Book Value per Common Share
Numerator:
Common shareholders' equity $ 227,183   $ 203,763  
Denominator:
Total Shares Outstanding 21,527,817   20,904,414  
Book Value Per Common Share $ 10.55   $ 9.75  
 
Book Value per Common Share, Excluding the Impact of Accumulated Other Comprehensive Income
Numerator:
Common shareholders' equity $ 227,183 $ 203,763
Accumulated other comprehensive income 2,763   4,011  
Shareholders' Equity, excluding AOCI $ 224,420   $ 199,752  
Denominator:
Total Shares Outstanding 21,527,817   20,904,414  
Underlying Book Value Per Common Share* $ 10.42   $ 9.56  
*  

Underlying book value per common share is a non-GAAP financial measure and is reconciled above to book value per common share, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this press release is in the "Definitions of Non-GAAP Measures" section of this document.

 

Definitions of Non-GAAP Measures

We believe that investors' understanding of UPC Insurance's performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited.

Combined ratio excluding the effects of current year catastrophe losses and reserve development (underlying combined ratio) is a non-GAAP ratio, which is computed as the difference between four GAAP operating ratios: the combined ratio, the effect of current year catastrophe losses on the combined ratio and prior year development on the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our business that may be obscured by current year catastrophe losses, losses from lines in run-off and prior year development. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most direct comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.

Net Loss and LAE excluding the effects of current year catastrophe losses and reserve development (underlying Loss and LAE) is a non-GAAP measure which is computed as the difference between loss and LAE, current year catastrophe losses and prior year reserve development. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these three items can have a significant impact on our loss trend in a given period. The most direct comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net losses and LAE and does not reflect the overall profitability of our business.

Consolidated net loss ratio excluding the effects of current year catastrophe losses, reserve development (underlying loss ratio) is a non-GAAP ratio, which is computed as the difference between three GAAP operating ratios: the consolidated net loss ratio, the effect of current year catastrophe losses on the loss ratio, and the effect of prior year development on the loss ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our consolidated net loss ratio that may be obscured by current year catastrophe losses and prior year development. As discussed previously, these two items can have a significant impact on our consolidated net loss ratio in a given period. The most direct comparable GAAP ratio is our net consolidated Loss and LAE ratio. The underlying loss ratio should not be considered as a substitute for net consolidated loss ratio and does not reflect the overall profitability of our business.

Book value per common share, excluding the impact of accumulated other comprehensive income, is a ratio that uses a non-GAAP measure. It is calculated by dividing common shareholders' equity after excluding accumulated other comprehensive income by total common shares outstanding plus dilutive potential common shares outstanding. We use the trend in book value per common share, excluding the impact of accumulated other comprehensive income, in conjunction with book value per common share to identify and analyze the change in net worth attributable to management efforts between periods. We believe the non-GAAP ratio is useful to investors because it eliminates the effect of interest rates that can fluctuate significantly from period to period and are generally driven by economic developments, primarily capital market conditions, the magnitude and timing of which are generally not influenced by management, and we believe it enhances understanding and comparability of performance by highlighting underlying business activity and profitability drivers. Book value per common share is the most directly comparable GAAP measure. Book value per common share, excluding the impact of accumulated other comprehensive income, should not be considered a substitute for book value per common share, and does not reflect the recorded net worth of our business.

Conference Call Details

 

Date and Time:

  

October 29, 2015 - 9:00 A.M. ET

 

Participant Dial-In:

(United States): 877-407-8829

(International):   201-493-6724

 

Webcast:

To listen to the live webcast, please go to www.upcinsurance.com (Investor Relations) and click on the conference call link, or go to: http://upcinsurance.equisolvewebcast.com/q3-2015

 

About UPC Insurance

Founded in 1999, UPC Insurance is an insurance holding company that sources, writes and services residential and commercial property and casualty insurance policies using a network of independent agents and a group of wholly owned insurance subsidiaries. Our insurance affiliates write and service property and casualty insurance in Florida, Georgia, Louisiana, Massachusetts, New Jersey, North Carolina, Rhode Island, South Carolina and Texas and are licensed to write in Alabama, Connecticut, Delaware, Hawaii, Maryland, Mississippi, New Hampshire, New York and Virginia. From its headquarters in St. Petersburg, UPC Insurance's team of dedicated professionals manages a completely integrated insurance company, including sales, underwriting, customer service and claims.

Forward-Looking Statements

Statements in this press release, conference call identified above, and otherwise, that are not historical facts are “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “or “continue” and other words with similar meanings. We believe these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements may be found in our filings with the U.S. Securities and Exchange Commission, including the “Risk Factors” section in our most recent Annual Report on Form 10-K and quarterly report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update or revise any forward-looking statement.

Consolidated Statements of Comprehensive Income

In thousands, except share and per share amounts

 
  Three Months Ended   Nine Months Ended
September 30, September 30,
2015   2014 2015   2014
REVENUE:
Gross premiums written $ 155,985 $ 105,065 $ 425,183 $ 322,986
Increase in gross unearned premiums (27,252 ) (4,214 ) (60,286 ) (29,901 )
Gross premiums earned 128,733 100,851 364,897 293,085
Ceded premiums earned (44,730 ) (35,741 ) (122,394 ) (99,757 )
Net premiums earned 84,003 65,110 242,503 193,328
Investment income 2,413 1,807 6,725 4,891
Net realized gains (losses) 323 (69 ) 312 (24 )
Other revenue 3,067   1,999   8,002   5,863  
Total revenues $ 89,806 $ 68,847 $ 257,542 $ 204,058
EXPENSES:
Losses and loss adjustment expenses 40,432 30,140 137,030 86,605
Policy acquisition costs 23,756 17,291 64,140 48,668
Operating expenses 4,329 3,086 12,679 8,453
General and administrative expenses 8,331 4,709 22,244 13,394
Interest expense 81   98   232   325  
Total expenses 76,929 55,324 236,325 157,445
Income before other income 12,877 13,523 21,217 46,613
Other income 107   —   292   16  
Income before income taxes 12,984 13,523 21,509 46,629
Provision for income taxes 4,901   4,883   7,953   17,010  
Net income $ 8,083   $ 8,640   $ 13,556   $ 29,619  
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gains (losses) on investments 641 (1,249 ) (1,722 ) 4,401
Reclassification adjustment for net realized investment (gains) losses (323 ) 69 (312 ) 24
Income tax (expense) benefit related to items of other comprehensive income (123 ) 456   786   (1,710 )
Total comprehensive income $ 8,278   $ 7,916   $ 12,308   $ 32,334  
 
Weighted average shares outstanding
Basic 21,290,759   20,745,245   21,193,825   19,658,199  
Diluted 21,528,546   20,843,603   21,427,398   19,756,411  
 
Earnings per share
Basic $ 0.38   $ 0.42   $ 0.64   $ 1.51  
Diluted $ 0.38   $ 0.41   $ 0.63   $ 1.50  
 
Dividends declared per share $ 0.05   0.04   0.15   0.12  
 

Consolidated Balance Sheets

In thousands

 
 

September 30,

  

December 31,

2015

2014

ASSETS
Investments available for sale, at fair value:
Fixed maturities $ 418,399 $ 352,630
Equity securities - common and preferred 24,303 25,987
Other investments 3,036   3,010  
Total investments $ 445,738   $ 381,627  
Cash and cash equivalents 84,341 61,391
Accrued investment income 2,565 2,239
Property and equipment, net 15,343 8,022
Premiums receivable, net 46,389 31,369
Reinsurance recoverable on paid and unpaid losses 2,804 2,068
Prepaid reinsurance premiums 120,657 63,827
Goodwill 4,196 —
Deferred policy acquisition costs 46,928 31,925
Other assets 11,719   1,701  
Total Assets $ 780,680   $ 584,169  
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 71,943 $ 54,436
Unearned premiums 299,419 229,486
Reinsurance payable 118,440 45,254
Other liabilities 51,048 37,701
Notes payable 12,647   13,529  
Total Liabilities $ 553,497   $ 380,406  
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued or outstanding — —
Common stock, $0.0001 par value; 50,000,000 shares authorized; 21,739,900 and 21,116,497 issued; 21,527,817 and 20,904,414 outstanding for 2015 and 2014, respectively 2 2
Additional paid-in capital 96,718 82,380
Treasury shares, at cost; 212,083 shares (431 ) (431 )
Accumulated other comprehensive income 2,763 4,011
Retained earnings 128,131   117,801  
Total Stockholders' Equity $ 227,183   $ 203,763  
Total Liabilities and Stockholders' Equity $ 780,680   $ 584,169