I have been on a bit of an insurance company kick these last couple weeks. I wrote extensively on AEG, a Dutch life insurance company whose charts are tantalizing, and combined with its market share power and strong balance sheet make a case for a bullish long position. As of writing this (11/30), that trade has yet to develop, but I am being patient (something I am always working on getting better at). However, I didn’t stumble across this company on my own digging. Arguably the smartest investor I communicate with shared this company with me, so I wanted to find out if there was something there. That company is United Insurance Holdings Corp. (UIHC).
Like most of my company review, I want to give an overview on the fundamentals before diving into the specifics. Looking at the financial strength of the company, its cash – to debt sits at 5.28, higher than 54% of the companies in its industry. Debt to equity is also sitting attractively at 0.11, which is better than 83% of the competitors in its industry.
Breaking Down Ratios
Ratios are pretty much middle of the road compared to the rest of the industry. Price to Owners Earnings is 14.62, lower than 53% of the companies in the industry. The company is trading 1.42 times book value, higher than 53% of competitors. The company is trading below sales at 0.83.
Margins and profitability aren’t great in the short-term, with operating margin sitting at -7.39%, Net Margin at -4.54%, ROE% of -7.70, and ROA% of -1.98. However, a bright spot in the growth of the company is their 3-year revenue growth rate of 20.60%, better than 88% of its competitors.
Next we’ll move on to trends in Revenues, income, equity, asset, operating cash flows, and FCF.
Trends
Looking at revenues since 2012 we see a steady increase from $131.2M in 2012 to $603.27 at the end of 2016. This impressive revenue growth, however, isn’t translating into an equal steady rise in net income. This is a problem. Net income rose from $9.71M in 2012 to $41.01M in 2014, but since then has declined into the negatives, with its most recent report of -$27.37. This is also a red flag and will be a topic of further discussion in this piece.
Another trend that isn’t great is the company’s free cash flow numbers, downtrending since 2015’s high of $87.4MM, and currently sitting at $56.1MM.
However, one interesting point of mention is that there is insider buying going on quite frequently. Over the last seven months there has been four instances of insider buying of substance.
Quarterly Report Findings
As a whole, the company appears to be killing it, achieving various milestones set for itself, most notably passing 500,000 policies in force, and $1B premiums in force, all of this amidst dealing with not one, but two hurricanes this year. Speaking of hurricanes, I would be a fool to go through this analysis of the company without mentioning the impacts of the hurricanes on its balance sheets and cash reserves.
Hurricane Impacts
Not only did the company deal with two CAT4 hurricanes in one season, but they hit Florida and Texas, the two largest states for the company in terms of exposure and policies. This type of uncharacteristic event to a company reminds me of the investment letters I read from Michael Burry in which he revealed the reason his portfolio was performing poorly was due to the fact that he loaded up on a couple of airline stocks (a majority of his portfolio) days (or weeks) before 9/11.
Despite historically un-probabilistic events, the company remained strong, reporting less than 20% of their reinsurance capacity used after the two hurricanes. That is quite the safety net, and it shows the financial discipline of the company, mainly because the company cannot anticipate events like this, it can only hope to be prepared when the time comes.
Bringing in Business
Although the hurricanes took up much of the company’s time and resources in the most recent quarter, they still managed to grow their business, writing 13,000 new business policies, which is a staggering number when you realize that two of the company’s largest states were shut down for almost the entire month. Personal policies grew by 4.7%, commercial policies grew by 1.1%, and retention rate came in at 90%.
Financials
The company achieved an increase in YoY revenue of 35% thereby improving underlying ops and expense ratios. Gross premiums written were up 38%, gross premiums earned were up 54% YoY, and net premiums earned up 27%. The company suffered an increase in losses of 97% from $73MM to $143MM due to the hurricanes and the inclusion of AmCo in their equations. The hurricanes added around $83MM of net losses, which in turn added over 53 points to the net loss ratio.
If you take out the hurricanes, the company’s gross underlying loss ratio actually improved over 12 points YoY, primarily due to lower attritional loss ratios of their AmCo commercial business. Their gross expense ratio improved 1.3 points to 27.1%. They ended the quarter with $2.2B in total assets, $1B of which are cash and invested assets, and that is a substantial improved compared to their mere $400MM same time last year.
Looking Ahead
The company believes it has still $2.2B of catastrophe reinsurance remaining until about May 31, 2018. Shareholder equity declined $501MM mainly due to the net loss during the most recent quarter.
The company looks strong fundamentally, and if it has the resiliency to withstand two of the biggest hurricanes to hit their two largest policy states in the same year, I think they will be fine from here on out, as I would be shocked to see another hurricane season like this past one, although you never know. Let’s turn over to the charts to see a good entry for this company.
Let’s Get Technical
Taking a look at the chart above you can see a really nice consolidation / symmetrical triangle pattern on the weeklys. The rule from Schabacker and McGee suggest entering on a 3% breakthrough from resistance, which in this case would be anything over 17.30. That’s good enough for me. Stop loss placement will vary by anticipated holding length. If you want to hold longer, I would suggest to place your stop-loss on the bottom end of the triangle, perhaps at $14.00. If you want to play it closer to the chest, a stop loss at $15.62 will suffice.
As always, shoot holes in this argument, find out where I’m wrong, and let me know so that I can grow.
The Market Plunger 