UIHC

Hi All,

I’m posting to present one of my holdings, United Insurance Holdings Corp (UIHC). UIHC is a small property and casualty insurer operating primarily in FL but which has begun expanding into other states. It focuses on offering homeowners insurance in locations subject to natural disasters. This is a market segment which the major carriers have been shying away from.

The company argues that it manages its risk via a proprietary pricing method for premiums—it argues that because it specializes in this product and because it has developed this pricing method, it can profit in this market where the majors cannot—and via the use of reinsurance. It also argues that the fact that it has weathered a number of hurricanes over its operating history and has paid out $500 million in claims associated with these hurricanes is evidence that its methods are sound.

The company historically operated in FL, and, as of 12/31/2014, three quarters of its premium revenue comes from FL. However, it now writes policies in MA, SC, RI, NC, TX, NJ, LA, and its business in these states is growing much faster than its FL business. Moreover, it plans to expand into 5 additional states (including HI) in the next couple of years.

Link to investor relations website: http://investors.upcinsurance.com

The company recently announced earnings, and they were a gigantic miss. As you will see below in the numbers, this miss makes thinking about this company a little challenging. Had you done a Saul-style analysis of the company one day before earnings, it would look fabulous. If you do a Saul-style analysis now, it looks awful.

So, the question is, do you ignore the gigantic miss? The miss came from large losses in the company’s new northeastern markets associated with the bad winter storms in the first quarter. As the company presents it, these storms were a one in 100K year thing, and so we should discount them (they don’t explicitly say you should discount them, of course, but that’s obviously what they mean). Ignoring them, the company seems to be on track, executing its business plan of very fast growth and geographical diversification. If you don’t ignore them, then you might question whether their business plan actually is sound.

Anyhow, the numbers are below. Mostly, I’ll let them speak for themselves, but three notes. First, notice that revenue growth still looks good as we go into Q1 2015 (though EPS collapses). Second, the company’s growth has been organic. The only acquisition in the period covered below was a small insurer in HI/LA, purchased for $9MM. This affected only revenue growth in LA in Q1 2015, and this amounted to only $4MM.

Third, the combined ratio is an insurance co metric which is losses + other expenses divided by premium revenue. Notice how it explodes in Q1 2015. Also, notice that has happened before, back in 2012. Also, notice how volatile it is. You would expect this given their concentration in FL and the disaster-driven nature of their business. Presumably it will get less volatile as the company expands and diversifies in other states.


  Revenue($MM)   Total    Year    Earnings per Share      Total
---------------  -----    ----    -------- --- -----      -----
 82                       2015    0.01
 68  68  69  76   280     2014    0.65  0.46  0.41  0.55   2.05
 44  49  52  63   208     2013    0.27  0.28  0.26  0.45   1.26
                  131     2012                             0.91
                   96     2011                             0.77

Growth                            Efficiency (higher is worse)
Year     Revenue  EPS             Year   Combined Ratio    Annual
-------  -------  ---             ----   --------------    ------
2013-14    37%    63%             2015   105
2012-13    59%    38%             2014    78  81  85  82     81
2011-12    36%    18%             2013    78  90  92  83     88
                                  2012                      107
(CAGR)                            2011                       86
2011-14    43%    39%

Current Price:       16.61
MRQ Book Value/shr:  10.14
P/B:                  1.64

EPS ( TTM): 1.43
EPS (2014): 2.05

PE  ( TTM): 16.61/1.43= 11.6
PE  (2014): 16.61/2.05=  8.1

EPS Growth (last 4Q vs previous 4Q):  1.43/1.63 = -13%
EPS Growth (2014 vs 2013):                         63%

2014 trailing PEG: 8.1/63 = 0.13

The stock got hammered over the last two days, down around 20%. I thnk it is now a great bargain, and I have added significantly to my own position. From my behavior, you can guess that I basically buy that Q1 2015 was a one-off event which should be ignored.

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Oh, I forgot to mention, there has been modest insider buying on this stock over the last few quarters and no significant insider selling since 2011.

– Bill

You might already be aware of this, but there is a very similar insurance company in Florida called Universal Insurance Holdings (UVE). It might be useful to do a comparison just to see if it gives you any additional insight into UIHC’s business. I know nothing about either one other than looking briefly at UVE many years ago when it was just a Florida insurer.

Ears

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