Professional Documents
Culture Documents
(NASDAQ: UIHC)
Kendyl Flinn, Jonathan Chang, Tianhao Fan
March 13, 2015
Agenda
Section I Industry Overview
Industry
Competitors
Business Model
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
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.
Industry Overview
Property & Casualty Insurance
Market Sentiment:
Closest Competitors:
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%
Other
23%
Commercial
Multi-Peril
7%
Other
Liability
9%
Medical
Malpractice
2%
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
St.Peters berg, FL
2008 IPO
$27.75
20.91M
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
88,500,000
Free Ca s h Fl ow
86,200,000
FCF to Equi ty
82,700,000
Total Revenue
$ 267,500,000
Ins ura nce Cl a i ms
116,300,000
90,700,000
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
Reserves/Assets: 54.59
Reserves Growth: 46.45%
Ownership Breakdown:
Debt/Equity: 13.67
CFO/Total liabilities: 32.30
Investment Advisor,
59.23%
Individual , 26.61%
Company Overview
Business Model
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
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
This is a untapped market, as most firms shy away from the added risk
UPC has a license to operate in nine additional states along the eastern coast
In order to grow their reinsurance business, UPC will have to become a larger and
more sturdy company, so management has tangible goal
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:
SC
8%
FL
74%
Other
26%
MA
7%
RI
6%
[CATEGORY NAME]
[PERCENTAGE]
Risk Premium:
12
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 $3.9 million
in 2013 (25%) increase
Revenue Growth:
350
300
250
200
150
100
50
0
2011
2012
Revenue
2013
Operating Margin
Revenue Breakdown:
EPS Growth:
2014
2013
2012
14
2014
1.97
1.27
0.78
2011
0
Net Premiums Earned
Capital Gains
Investment Income
Operating Income
0.5
1.5
Valuation
Section IV
Valuation
Comparable Analysis
Market
Cap ($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
17
2019
26.0%
23.0%
20.0%
9.98%
$
$
204
171
0.0%
106
532
331
706
21.5
32.87
11.0%
31.31
29.97
28.64
27.31
25.98
11.5%
29.36
28.11
26.86
25.62
24.37
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:
20
Recommendation
Catalysts
Niche Market:
600000
400000
200000
0
PIF
2011
TIV (thousands)
2012
2013
2014
PMI
Appendix
23
Cat Banding
Objective:
24