You are on page 1of 25

United Insurance Holding Corp.

(NASDAQ: UIHC)
Kendyl Flinn, Jonathan Chang, Tianhao Fan
March 13, 2015

Agenda
Section I Industry Overview

Industry

Competitors

Section II Company Overview

Company and Market

Business Model

Section III Investment Thesis


Section IV Valuation
Section V Recommendation

Risks

Catalysts

Industry Overview
Section I

Industry Overview
Insurance
Background:
There are two types of companies in the insurance industry: Life
Insurers and Property & Casualty Insurers
Insurers generally generate profits through underwriting and
investing

The Major Players by NPW:


AIG, 4%

Nationwide,
4%
State Farm,
12%

Travelers, 5%

Underwriting:
They underwrite or insure businesses, individuals, cars, home,
etc. at premium
The premiums from all insurance policies a company holds are
pooled, and a percent has to be held in reserve for claims and
expense
The rest is used for operating expense or brought down to the
bottom line for the company.
Investing:
Insurance companies also typically hold a large investment
portfolio to generate excess return
Investments are predominately in Fixed Income because
insurance companies hold their risk in the policies they sell
Through bonds, insurance companies generate interest income
Portfolios also include equity which generates dividend income
Both forms of investment contribute to a firms realized gain
when sold off

Berkshire
Hathaway, 8%

Liberty Mutual,
5%
Allstate, 6%

Increased Demand:
During the 2008 financial crisis, insurance companies incurred
larger losses and the industry shrunk
Since 2010, the market as improved through increases in
policy prices, and a higher demand for insurance
As the housing market and individual wealth continue to
increase, more people will have the needs and means to buy
insurance
Historically, there have been industry surpluses post-crisis
which is what we are seeing now after 2008. The industry will
continue its growth, and smaller firms will have an opportunity
to develop market share that didnt previously exist.

*Merrill Insurance Primer

Industry Overview
Property & Casualty Insurance
Market Sentiment:

Closest Competitors:

The market is not bullish on P&C insurance because there is


a view of limited growth in the space

State Auto Financial Corp. (STFC)


Regional P&C insurer throughout Midwest and
northeast
P/E 183.95X
ROE 7.4%
Selective Insurance Group (SIGI)
Serve customers including small businesses,
government entities, individuals, and families
P/E 12.69
ROE 11.7%

Policy price increases have been going up for two years and
are expected to decelerate in growth
Due to low interest rates, investment incomes have seen
less growth and return
The reinsurance business is lagging because companies are
now bouncing back from recession, and not interested

Breakdown of Industry:

Regulatory Environment:

Homeowner
s
Workers'
15%
Compensati
on
8%

Personal
Auto
36%

The regulations are run at a state level and vary in severity


However, P&C firms were not at high risk during the financial
crisis because they write policies based on tangible assets

Other
23%
Commercial
Multi-Peril
7%

Post 2008, many regulations were put in regarding insurance


reserves for losses

Other
Liability
9%

Medical
Malpractice
2%

This is an industry that will likely only see deregulation in the


future, and has been overlooked with major events being
concentrated on banks

Company Overview
Section II

Company Overview
The Company
Capitalization Table:
United Insurance Holding Corp. is a holdings company that runs
a Property & Casualty Insurance company and its affiliates
They started in Florida in 1999 and became a publicly traded
company in 2008.
The P&C insurer currently operates in seven states with just
over 100 employees
Lines of business include: homeowners, commercial residence,
condominiums, renters, dwelling fire, flood

United Insurance (UIHC)

St.Peters berg, FL
2008 IPO

Pri ce per Sha re

$27.75

Sha res Outs tandi ng

20.91M

Fi na nci a l s - P&C Ins ura nce

Market Capitalization

Total Debt +

13,824,000

Preferred Sha re +

Mi nori ty Interes t +

Ca s h -

83,318,000

Enterprise Value

502,886,817

Ca s h from Opera ting Activi ty

88,500,000

Free Ca s h Fl ow

86,200,000

FCF to Equi ty

82,700,000

Total Revenue

Use Cat Banding pricing model

$ 267,500,000
Ins ura nce Cl a i ms

116,300,000

Underwri ting Cos ts

90,700,000

CEO: John L. Forney, CFO: B. Bradford Martz, Chairman: Gregory


Branch
Historical Price

EBITDA

30

Net Income

$ 37,000,000

25

Total As s ets

$ 441,200,000

Total Li a bi l i ties

$ 333,600,000

20

10
5
0
Jan-14

60,500,000
Interes t Expens e

400,000

EBIT

60,100,000
Income Ta x

23,100,000

Cash Position

15

Ta ngi bl e BV / Sha re
% of Ins i der Sha res Hel d

Mar-14

May-14

Jul-14

Sep-14

Nov-14

572,380,817

2014

9.16
18.04 (+1.71%)

Jan-15

Market Cap $485.3 million - EV $429.41 million - P/E 11.41 - EPS $2.05 Price $23.40
6

Company Overview
Market Summary
Financial Metrics:
Price: $27.50

Recent News:
Net Premiums Earned: $197.4 million

52-week Range: $12.59-$28.43 % YoY Growth: 61.8%


P/E: 13.92X
Catas Loss as % of Net Prem: 1.82%
EPS: $1.26
% YoY Growth: 38%

Net Prem/Equity: 183.46

Dividend: $0.05 /share

Investment Income: $3.9 million

Operating Income/Net Prem: 17.66

Dividend Yield: 0.55%


P/B: 2.99

Reserves/Assets: 54.59
Reserves Growth: 46.45%

EV/Total Revenue: 1.88

Ownership Breakdown:

EV/Net Income: 13.62


Total Debt/EV: 0.04

Debt/Equity: 13.67
CFO/Total liabilities: 32.30

Combined Ratio: 84.80

March 3rd, 2014


United Insurance files 8-K and holds press conference on
2014 10-K
February 9th, 2015
Increased 4th quarter cash dividend to $0.05 per share from
$0.04 per share
February 3rd, 2015
Completed acquisition of Family Security Holdings LLC., it
was a $9 million all stock transaction of 503,883 shares
July 29th, 2014
United Insurance Net Premiums Earned for Q2 was up 40%
year-over-year

Private Equity , 2.48%


Hedge Fund Manager,
10.41%

Total Debt/Total Assets: 3.33

Loss Ratio: 46.30


Expense Ratio: 38.50

Pension Fund , 0.91%

Investment Advisor,
59.23%
Individual , 26.61%

Company Overview
Business Model

United Insurance Holding Corp.

United Property and


Casualty Insurance
Company
Main Insurer

United Insurance
Management
Management
Services

Skywalk Claims
Service
Non-catastrophe
claims inspector

UPC Re
Reinsurance
program

Company Overview
Annotated Price Chart

February 2015: Q4
Dividend $0.05

30
December 2014: Completed
acquisition of Family Security
Holdings LLC

25
May 2014: Earnings
Announcement beat
est. by 105.05%

20
March 2014: Earnings
Announcement beat
est. by 57.89%

15

10

August 2013: Earnings


Announcement beat
est. by 23.40%

5
May 2013: Q1
2013 Dividend
$0.03

November 2014:
Earnings
Announcement
beat est. by 9.92%

March 2014: Q4
2013 Dividend
$0.04

October 2013:
Q3 2013
Dividend $0.03

August 2014:
Earnings
Announcement
beat est. by 7.73%
October 2014: Announced
acquisition of Citizens Property
Insurance Corp.

Investment Thesis
Section III

Investment Thesis

Niche
Market

Expansion
Potential

Earnings
Growth

11

United Insurance (UPC) operates in seven states, specifically concentrating on


areas that are of high risk for natural catastrophe

This is a untapped market, as most firms shy away from the added risk

UPC started in Florida, and therefore understands environment and how to


properly allocate reserves to mitigate risk

UPC has a license to operate in nine additional states along the eastern coast

The holdings corporation has announced a number of acquisitions

In order to grow their reinsurance business, UPC will have to become a larger and
more sturdy company, so management has tangible goal

UPC restructured their operations in 2011 and hired new management

Since the restructuring they have been able to continually generate sizable
earnings growth

Their earnings growth is attributable to increased underwritings and a strong costcutting structure

Investment Thesis
Niche Market
Natural Catastrophes:

Geographic Breakdown of Policies:

Main areas of coverage:


Homeowners
Flood
Liability
Windstorm mitigation
Focus on areas with exposure to hurricanes

SC
8%

FL
74%

Other
26%

Becoming experts on a profitable industry

MA
7%
RI
6%
[CATEGORY NAME]
[PERCENTAGE]

Risk Premium:

12

United does an excellent job of controlling their


exposure to risk through geographic diversification
of policies, and pricing an appropriate premium to
generate return
They also reduce risks in their investing portfolio to
compensate

Investment Thesis
Planned Growth
Company Tactics:
The company operates in seven states
They have licence to work in nine more along east
coast
Their pricing strategy is successful in a variety of
geographic locations so organic growth is not
dependent on geographic market share
UPC just completed acquisition of Family Security
Holdings and announced acquisition of citizens
property insurance
Macro Growth:
As the market continues to improve, climbing away
from 2008, the company will continue to see growth in
Policies in Force (PIC)
They are a smaller company, so they are able to grow
with the market
UPC is not stressed over regulation because it
operates in a high risk market, it already keeps good
reserves and is able to generate the premiums to match

13

Licensed
App. Pending
Future

Investment Thesis
Earnings Breakdown and Growth
Company Tactics:
The company is keeping employee costs and
overhead low in order to generate a larger operating
margin
UPC has increased the amount of policy held and are
focused on increasing premiums written
In this niche market, only a small increase in policies
generates a large increase in premiums
Total Investments are at $288.9 million and have
grown 89.9% YoY investment income was $3.9 million
in 2013 (25%) increase

Revenue Growth:
350
300
250
200
150
100
50

0
2011

2012
Revenue

2013

Operating Margin

Revenue Breakdown:

As interest rates begin to rise, we will see investment


income continue to increase as a percent of net
premiums

EPS Growth:

2014

ROIC increased 81.17% in 2013 to 31.78

2013

Five year revenue growth is 15.54%, and I believe,


will continue to be sustainable

2012

Book Value per share has also increased by 10.28%


over past 5 years

14

2014

1.97
1.27
0.78

2011
0
Net Premiums Earned

Capital Gains

Investment Income

Operating Income

0.5

1.5

Valuation
Section IV

Valuation
Comparable Analysis
Market
Cap ($MM)
American Catastrophe Insurance Companies
Cincinnati Financial Corp.
Arch Capital Group Ltd.
W.R. Berkley Corporation
Kemper Corporation
Selective Insurance Group Inc.
State Auto Financial Corp.
Mean
Median
United Insurance Holding Corporation

BVPS

TBVPS

LTM

P/E
2015E

2016E

Dividend
Yield

ROE %

Combined
Ratio

$8,719.7
7,768.0
6,366.0
2,013.4
1,633.5
970.4

$40.2
46.3
36.2
39.9
22.5
21.3

$40.2
45.4
34.3
33.9
22.4
21.3

16.7 x
10.2 x
10.4 x
18.4 x
11.6 x
9.1 x

19.5 x
15.9 x
14.7 x
15.6 x
12.0 x
14.3 x

18.9 x
15.2 x
13.6 x
13.8 x
11.5 x
12.9 x

3.4%
0.9%
2.5%
1.9%
1.7%

8.3%
12.9%
14.4%
5.4%
11.7%
13.0%

95.6
87.2
93.8
103.7
95.8
105.5

4,578.5
4,189.7

34.4
38.0

32.9
34.1

12.7 x
11.0 x

15.3 x
15.2 x

14.3 x
13.7 x

2.1%
1.9%

11.0%
12.3%

96.9
95.7

$502.3

$9.8

$9.8

11.4 x

13.6 x

11.7 x

0.9%

26.3%

81.4

Discount to Mean
Discount to Median

(10%)
4%

(11%)
(10%)

(18%)
(15%)

(57%)
(53%)

140%
114%

(16%)
(15%)

UPC is one of the smallest P&C insurance companies in the United States
They have a smaller revenue due to their size, but still have a competitive EPS
UPC, as discussed, is also making a far better return then any of their competitors
They are able to keep their operating margin high meaning their underwriting and claim expenses are lower than competitors
Even if their return was halved, United would still be doing better than 80% of comparable competitors
Additionally, I believe they will not only be able to sustain this return, but also grow their market share as they increase policies and states of
operation

16

Valuation
Residual Income Model
($ in Millions Except Per Share Data)
United Insurance Holding Corp. - Residual Income Model
Historical
Projected
October 31
2014
2015
2016
2017
2018
2019
Normalized Net Income to Common: $
20 $
41.0 $
59 $
73 $
79 $
95 $
98
% Growth:
44.2%
23.5%
7.8%
20.6%
3.4%
Common Dividends:
1.90
3.3
5.3
7.3
8.7
11.4
12.8
% Growth:
61.3%
37.2%
18.6%
31.5%
12.0%
Payout Ratio:
8.1%
9.0%
10.0%
11.0%
12.0%
13.0%
Beginning Common Equity:
Plus: Net Income to Common:
Plus: SBC and Forex Effects
Less: Common Dividends:
Less: Deferred Policy Costs
Ending Common Equity:
Return on Common Equity:
Residual Income / Excess Returns:
Discount Period:
PV of Residual Income:

108 $

204 $
59
0.6
(5)
(7)
251 $

251 $
73
0.6
(7)
(7)
311 $

311 $
79
0.6
(9)
(7)
374 $

374 $
95
0.6
(11)
(7)
451 $

451
98
0.6
(13)
(7)
530

26.0%
36 $

26.0%
45 $

23.0%
45 $

23.0%
54 $

20.0%
49

1.0
33 $

2.0
37 $

3.0
34 $

4.0
37 $

5.0
31

204 $
26.3%

0.0

MetLife - Net Present Value Sensitivity - Long-Term Return on Common Equity


Cost of Equity
$
32.87
8.5%
9.0%
9.5%
10.0%
22.0%
44.80
41.46
38.49
35.84
21.0%
42.86
39.68
36.84
34.31
20.0%
40.93
37.89
35.19
32.78
19.0%
39.00
36.11
33.54
31.24
18.0%
37.07
34.33
31.89
29.71

17

Residual Income Assumptions


Maturity Year Begins:

2019

Return on Common Equity:


Development:
Maturity:
Long-Term:
Cost of Equity:

26.0%
23.0%
20.0%
9.98%

Present Value of Equity Calculations:


Current Value of Common Equity:
$
Sum of PV of Residual Income:
Terminal NI Growth Rate:
Estimated Year 6 NI to Common:
Residual Income Terminal Value:
PV of Res. Inc. Terminal Value:
Present Value of Equity:
Diluted Shares:
Implied Share Price:

$
$

204
171
0.0%
106
532
331
706
21.5
32.87

Cost of Equity Calculation


10.5%
33.46
32.03
30.60
29.18
27.75

11.0%
31.31
29.97
28.64
27.31
25.98

11.5%
29.36
28.11
26.86
25.62
24.37

Risk Free Rate (10yr)


5 Year Beta
Equity Risk Premium
Risk Premium for Catastrophe
Cost of Equity

2.0%
0.92
6.5%
2.0%
9.98%

Valuation
Summary

Price Target:
$30
Implied Upside
of 30.4%
RIV Model

P / E LTM

32.03

$22.66

$26.23

P / E 2015E

P / E 2016E

18

$31.26

$28.28

$29.48

$31.60

33.54

Recommendation
Section V

Recommendation
Risks
Too Small to Trust:

High Risk Locations:

Have been operating since 1999 in the areas with


highest loss risk

They purposefully write policies in areas with high


risk for natural disaster

They are not highly levered, and purposefully keep a


safe investment portfolio in order to minimize risk

This could been seen as a risk if a large unexpected


hurricane happened, and UPC incurred large claim
losses

They are actively making acquisitions in the industry,


showing that they are not yet at risk to be bought out
Being small allows them to increase their operating
margin, and retain a larger percent of their premiums
as profit
Macro Trends:
If the market continues to be bearish on P&C and
insurance in general, it could take a while for a
significant re-correction in Uniteds price
Realization is already being seen through 25% stock
price increase in the past month
Interest rates staying low could keep investment
income from growing, but the majority of UPCs
profit is through increase in net premiums

20

However, UPC combats this fear with their


geographic policy diversification
Additionally, UPC has a reserve to asset ratio of 54.59
and has enough capital on its books to sustain a
disaster
It knows how to price policies in areas with natural
disasters, and keeps a strong reserve
This knowledge allows them to not only decrease loss
but also pending claims, which are only at 2.9%

Recommendation
Catalysts
Niche Market:

Generate High Return:

Very few companies will add risk to their policies by


focusing on areas with high risk for natural
catastrophes

The company has been generating incredible returns


on all metrics, and has generated a substantial safety
net of reserves

UPC already has an advantage in gaining market


share an increasing policies
Additionally, they understand the market and are
able to price appropriately and keep adequate
reserves
In case of an extreme disaster, UPC also has a four
layer catastrophe reinsurance plan; however this plan
has never been needed thus far
800000

The ROE has been steadily increasing since 2011. It


was 20.8% in 2013 which was a 53.23% increase
This impressive ROE with the higher P/B ratio
signifies that investors are willing to pay more based
on the estimated book value growth
Future Opportunities:
Negative market sentiment resulted in the company
being undervalued
It has the capital and acquisition opportunities to
build a marketable brand

600000
400000

Dedicating 100% of capital to growing UPCs


insurance business

200000
0
PIF
2011

TIV (thousands)
2012

2013

2014

PMI

A marketable brand will create recognition of the


company value and generate a satisfying return on
investment

We recommend United Insurance Holding Corporation as a buy.


21

Appendix

CEO: John L Forney


Overview:

Has been at UPC since 2012


Attended Princeton then received MBA from Wharton
Went into the army then returned to banking and got his CFA

Worked as managing director at Raymond James


Previously managed residential natural catastrophe risk at State
Farm and Allstate

23

Cat Banding

Objective:

To create geographic areas so that within each Cat Band


the expected losses are within a specified range of error from
central estimate.

24