uihc presentation
DESCRIPTION
NATRANSCRIPT
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United Insurance Holding Corp. (NASDAQ: UIHC)
Kendyl Flinn, Jonathan Chang, Tianhao Fan
March 13, 2015
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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
Agenda
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Section I
Industry Overview
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Industry Overview
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Background:
Increased Demand:
Insurance
There are two types of companies in the insurance industry: Life Insurers and Property & Casualty Insurers
Insurers generally generate profits through underwriting and investing
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
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
State Farm, 12%
Berkshire Hathaway, 8%
Allstate, 6%
Liberty Mutual, 5%
Travelers, 5%
AIG, 4% Nationwide,
4%
The Major Players by NPW:
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Industry Overview
4
Market Sentiment:
Breakdown of Industry:
Property & Casualty Insurance
Personal Auto 36%
Medical Malpractice
2% Other
Liability 9%
Commercial Multi-Peril
7%
Other 23%
Workers' Compensati
on 8%
Homeowners
15%
The market is not bullish on P&C insurance because there is a view of limited growth in the space
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
Closest Competitors:
Post 2008, many regulations were put in regarding insurance reserves for losses
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
This is an industry that will likely only see deregulation in the future, and has been overlooked with major events being concentrated on banks
Regulatory Environment:
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%
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Section II
Company Overview
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Company Overview
6
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
Use Cat Banding pricing model
CEO: John L. Forney, CFO: B. Bradford Martz, Chairman: Gregory Branch
The Company
Market Cap $485.3 million - EV $429.41 million - P/E 11.41 - EPS $2.05 Price $23.40
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Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15
Historical Price
Capitalization Table:
United Insurance (UIHC) St.Petersberg, FL
2008 IPO
Price per Share $27.75 Financia ls - P&C Insurance
Shares Outstanding 20.91M
Market Capitalization 572,380,817$
Total Debt + 13,824,000
Preferred Share + 0
Minori ty Interest + 0
Cash - 83,318,000
Enterprise Value 502,886,817$
Total Revenue 267,500,000$
Insurance Cla ims 116,300,000
Underwriting Costs 90,700,000
EBITDA 60,500,000
Interest Expense 400,000
EBIT 60,100,000
Income Tax 23,100,000
Net Income 37,000,000$
Total Assets 441,200,000$
Total Liabi l i ties 333,600,000$
2014
Cash from Operating Activi ty 88,500,000$
Free Cash Flow 86,200,000$
FCF to Equity 82,700,000$
Tangible BV / Share 9.16$
% of Ins ider Shares Held 18.04 (+1.71%)
Cash Position
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Company Overview
7
Financial Metrics: Recent News:
Ownership Breakdown:
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
Market Summary
Investment Advisor, 59.23%
Individual , 26.61%
Hedge Fund Manager, 10.41%
Private Equity , 2.48% Pension Fund , 0.91%
Price: $27.50 Net Premiums Earned: $197.4 mill ion
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 Net Prem/Equity: 183.46
% YoY Growth: 38% Operating Income/Net Prem: 17.66
Dividend: $0.05 /share Investment Income: $3.9 mill ion
Dividend Yield: 0.55%
P/B: 2.99 Reserves/Assets: 54.59
Reserves Growth: 46.45%
EV/Total Revenue: 1.88
EV/Net Income: 13.62
Total Debt/EV: 0.04 Debt/Equity: 13.67
CFO/Total l iabilities: 32.30
Combined Ratio: 84.80 Total Debt/Total Assets: 3.33
Loss Ratio: 46.30
Expense Ratio: 38.50
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Company Overview
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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
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Company Overview
9
Annotated Price Chart
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February 2015: Q4 Dividend $0.05
November 2014: Earnings
Announcement beat est. by 9.92%
August 2014: Earnings
Announcement beat est. by 7.73%
May 2014: Earnings Announcement beat
est. by 105.05%
March 2014: Q4 2013 Dividend
$0.04
March 2014: Earnings Announcement beat
est. by 57.89%
May 2013: Q1 2013 Dividend
$0.03
October 2013: Q3 2013
Dividend $0.03
August 2013: Earnings Announcement beat
est. by 23.40%
October 2014: Announced acquisition of Citizens Property
Insurance Corp.
December 2014: Completed acquisition of Family Security
Holdings LLC
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Section III
Investment Thesis
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Investment Thesis
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Niche
Market
Expansion Potential
Earnings Growth
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 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 cost-cutting structure
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
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Investment Thesis
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Natural Catastrophes: Geographic Breakdown of Policies:
Risk Premium:
Niche Market
Main areas of coverage: Homeowners Flood Liability Windstorm mitigation
Focus on areas with exposure to hurricanes
Becoming experts on a profitable industry
FL 74%
SC 8%
MA 7%
RI 6%
[CATEGORY NAME] [PERCENTAGE]
Other 26%
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
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Investment Thesis
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Company Tactics:
Planned Growth
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
Licensed App. Pending Future
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Investment Thesis
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Company Tactics: Revenue Growth:
Revenue Breakdown: EPS Growth:
Earnings Breakdown and Growth
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 $3.9 million in 2013 (25%) increase
As interest rates begin to rise, we will see investment income continue to increase as a percent of net premiums
ROIC increased 81.17% in 2013 to 31.78
Five year revenue growth is 15.54%, and I believe, will continue to be sustainable
Book Value per share has also increased by 10.28% over past 5 years
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2011 2012 2013 2014
Revenue Operating Margin
0.78
1.27
1.97
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2012
2013
2014
Net Premiums Earned Capital Gains
Investment Income Operating Income
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Section IV
Valuation
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Valuation
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UPC is one of the smallest P&C insurance companies in the United States
They have a smaller revenue due to their size, but still have a competitive EPS
UPC, as discussed, is also making a far better return then any of their competitors
They are able to keep their operating margin high meaning their underwriting and claim expenses are lower than competitors
Even if their return was halved, United would still be doing better than 80% of comparable competitors
Additionally, I believe they will not only be able to sustain this return, but also grow their market share as they increase policies and states of operation
Comparable Analysis
Market P / E Dividend Combined
Cap ($MM) BVPS TBVPS LTM 2015E 2016E Yield ROE % Ratio
American Catastrophe Insurance Companies
Cincinnati Financial Corp. $8,719.7 $40.2 $40.2 16.7 x 19.5 x 18.9 x 3.4% 8.3% 95.6
Arch Capital Group Ltd. 7,768.0 46.3 45.4 10.2 x 15.9 x 15.2 x - 12.9% 87.2
W.R. Berkley Corporation 6,366.0 36.2 34.3 10.4 x 14.7 x 13.6 x 0.9% 14.4% 93.8
Kemper Corporation 2,013.4 39.9 33.9 18.4 x 15.6 x 13.8 x 2.5% 5.4% 103.7
Selective Insurance Group Inc. 1,633.5 22.5 22.4 11.6 x 12.0 x 11.5 x 1.9% 11.7% 95.8
State Auto Financial Corp. 970.4 21.3 21.3 9.1 x 14.3 x 12.9 x 1.7% 13.0% 105.5
Mean 4,578.5 34.4 32.9 12.7 x 15.3 x 14.3 x 2.1% 11.0% 96.9
Median 4,189.7 38.0 34.1 11.0 x 15.2 x 13.7 x 1.9% 12.3% 95.7
United Insurance Holding Corporation $502.3 $9.8 $9.8 11.4 x 13.6 x 11.7 x 0.9% 26.3% 81.4
Discount to Mean (10%) (11%) (18%) (57%) 140% (16%)
Discount to Median 4% (10%) (15%) (53%) 114% (15%)
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Valuation
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Residual Income Model
($ in Millions Except Per Share Data)
United Insurance Holding Corp. - Residual Income Model Residual Income Assumptions
Historical Projected
October 31 2014 2015 2016 2017 2018 2019 Maturity Year Begins: 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% Return on Common Equity:
Common Dividends: 1.90 3.3 5.3 7.3 8.7 11.4 12.8 Development: 26.0%
% Growth: 61.3% 37.2% 18.6% 31.5% 12.0% Maturity: 23.0%
Payout Ratio: 8.1% 9.0% 10.0% 11.0% 12.0% 13.0% Long-Term: 20.0%
Cost of Equity: 9.98%
Beginning Common Equity: 108$ 204$ 251$ 311$ 374$ 451$
Plus: Net Income to Common: 59 73 79 95 98 Present Value of Equity Calculations:
Plus: SBC and Forex Effects 0.6 0.6 0.6 0.6 0.6 Current Value of Common Equity: 204$
Less: Common Dividends: (5) (7) (9) (11) (13) Sum of PV of Residual Income: 171
Less: Deferred Policy Costs (7) (7) (7) (7) (7)
Ending Common Equity: 204$ 251$ 311$ 374$ 451$ 530$ Terminal NI Growth Rate: 0.0%
Estimated Year 6 NI to Common: 106
Return on Common Equity: 26.3% 26.0% 26.0% 23.0% 23.0% 20.0% Residual Income Terminal Value: 532
Residual Income / Excess Returns: 36$ 45$ 45$ 54$ 49$ PV of Res. Inc. Terminal Value: 331
Present Value of Equity: 706$
Discount Period: 0.0 1.0 2.0 3.0 4.0 5.0 Diluted Shares: 21.5
PV of Residual Income: 33$ 37$ 34$ 37$ 31$ Implied Share Price: 32.87$
MetLife - Net Present Value Sensitivity - Long-Term Return on Common Equity
Cost of Equity
32.87$ 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5%
22.0% 44.80 41.46 38.49 35.84 33.46 31.31 29.36 Risk Free Rate (10yr) 2.0%
21.0% 42.86 39.68 36.84 34.31 32.03 29.97 28.11 5 Year Beta 0.92
20.0% 40.93 37.89 35.19 32.78 30.60 28.64 26.86 Equity Risk Premium 6.5%
19.0% 39.00 36.11 33.54 31.24 29.18 27.31 25.62 Risk Premium for Catastrophe 2.0%
18.0% 37.07 34.33 31.89 29.71 27.75 25.98 24.37 Cost of Equity 9.98%
Cost of Equity Calculation
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Valuation
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Summary
$28.28
$31.26
$22.66
32.03
$29.48
$31.60
$26.23
33.54
P / E 2016E
P / E 2015E
P / E LTM
RIV Model
Price Target: $30
Implied Upside
of 30.4%
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Section V
Recommendation
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Recommendation
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Too Small to Trust: High Risk Locations:
Macro Trends:
They purposefully write policies in areas with high risk for natural disaster
This could been seen as a risk if a large unexpected hurricane happened, and UPC incurred large claim losses
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%
Risks
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
Have been operating since 1999 in the areas with highest loss risk
They are not highly levered, and purposefully keep a safe investment portfolio in order to minimize risk
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
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Recommendation
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Niche Market: Generate High Return:
Future Opportunities:
The company has been generating incredible returns on all metrics, and has generated a substantial safety net of reserves
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
Catalysts
Very few companies will add risk to their policies by focusing on areas with high risk for natural catastrophes
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
Negative market sentiment resulted in the company being undervalued
It has the capital and acquisition opportunities to build a marketable brand
Dedicating 100% of capital to growing UPCs insurance business
A marketable brand will create recognition of the company value and generate a satisfying return on investment
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PIF TIV (thousands) PMI
2011 2012 2013 2014
We recommend United Insurance Holding Corporation as a buy.
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Appendix
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CEO: John L Forney
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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
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Cat Banding
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Objective:
To create geographic areas so that within each Cat Band the expected losses are within a specified range of error from central estimate.