United Insurance Holding (UIHC) is an insurance company trading at $163M in market cap. They provide property and casualty insurance. They have had a fall from grace and were trading at a market cap of $800m previously and are a shadow of their former selves. This drop in share price was related to a string of losses.
These strings of losses started in 2018, and relates to when the current CEO and largest shareholder joined UIHC. I have been trying to understand what caused this underperformance. I have tried looking up news and events and nothing notable came up. Looking at the income statements and comparing the years, it seems that the largest change in expenses in 2018 compared to the other years relates to;
- Losses and loss adjustment expenses
- Policy acquisition costs
These two costs are quite interrelated. Policy acquisition costs, as the name suggests, relates to expenses incurred in obtaining new contracts. Losses and loss adjustment expense is more nuanced and relates to technical insurance accounting. This represents the movement in insurance claims that could potentially be payable at the balance sheet date.
The new CEO may have wanted to immediately leave his mark by aggressively increasing sales. However, this came at a cost of higher risk and those acquisition costs. Resulting in the reduction of profits. The graph below shows the change in share price from Jan 2020.
UIHC currently have net equity of $360m and as mentioned already trades at a PB of .48c. I feel that this is criminally under valued especially when considering the amount of cash on hand ($276m) which is approximately Price/cash ratio of .59. As UIHC is trading cheaply I considered that there may be some risk over its going concern, however, looking at the yield to maturity of its $157m bonds shows that it trades at a safe 5.5%. Creditors view this as a low risk of liquidation.
The main risk of insurance company valuations is the trust investors need to place on actuarial scientists in order to determine the maximum exposure to risk. Based on their latest figures there is $1,136m of potential claims against UIHC which has been covered by $927m of recoverable re-insurance. This means, in worst case scenario and all their clients claim from UIHC, $209m would need to be settled net by UIHC. They have sufficient cash on hand to cover the worst-case scenario. The auditors of UIHC is Deloitte (largest of the big4 auditing firms) who would have access to actuaries to assist with these valuations.
Looking forward, UIHC’s revenue has fallen by a whopping 28% in the current quarter compared to last year. This is large but investigating closer it mostly relates to the increase in costs relating to reinsurance from $158m in 2020 to $210m in 2021 (these costs offset revenue). Other than this, revenue has remained mostly the same, gross premiums earned is higher for the three months ended June and 6 months ended June in 2021 compared to 2020 of around 3.5%. All other expenses remained roughly the same (1% increase).
The CEO confirms the reason for the increase in revenue in the August 2021 press release;
This also had a knock on effect on the statement of cash flow, with the cash outflow from line item “reinsurance recoverable on paid and unpaid losses” single handedly causing UIHC to be in cash losing position operationally, compared to last year.
Ownership – insider buys
What drew me to this stock was the string of insider buys that happened in quick succession as it shows that management is putting their own money on the line.
What is particularly interesting to me is that most of these investors bought at the beginning of the year at a price of $7. Not only have these insiders held onto their holdings, they increase their holdings over the last few weeks, in spite of the bad news reported in their September press release of an estimated $27m insurance shortfall due to Tropical Storm Elsa and Hurricane Ida. UIHC has limited itself to similar future circumstances by capping its risk to $9m.
From Yahoo Finance;
The CEO and his wife(?) currently has the highest ownership in the business. He acquired his position in 2017 at a total estimated price of $293m (according to Whale Wisdom) and currently owns 48% of the business. Naturally this makes me worried that the CEO can dump his stock overtime (in total he sold 131,800 shares between January 2019 and March 2019), however due to the low current cost compared to his buy-in and his work history he seems to be in it for the long term.
As the CEO has such a large holding, I decided to look at the work history of the CEO and to see if he commits to projects. Linkedin profile of CEO confirms that he does! He was at AmRisc for 19 years before joining UIHC. It doesn’t seem that he would quickly dump his position on any share price bounce due to his commitment to one project at a time.
See ownership structure for institutional investors;
Some bearish counterpoints (I did not expand on this as I feel that this has mostly been addressed)
- Operate mostly in Florida which I understand, may be prone to hurricanes (risk has been mitigated as previously mentioned);
2) Declining profitability due to the costs incurred in mitigates risk. These costs reduce profitability
3) Latest SEC filing warning of storm losses of $24m (from Yahoo Finance)
This article was written by u/AMDG__.