Can United Insurance Holdings Double?

| About: United Insurance (UIHC)
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After crushing from $7.91 per share to $2.57 during the Great Recession, it took United Insurance Holdings Corporation (NASDAQ:UIHC) 4 years to recover most of its losses and move back up to $6.70 per share. Can the company double from here?

UIHC Market Cap Chart

In 1999, the company raised $5.5 million of capital to start its operations. In 13 years, the company's market cap reached $107 million which is a great success. In the last 14 years, United Insurance was able to claim net profits for 13 years and there has been only one year when the company reported a loss. More impressively, the company survived through the hurricane seasons of 2004 and 2005 when its customers filed 33,000 claims totaling $500 million (United Insurance has a lot of presence in Florida where hurricanes are pretty common).

The chart below shows a short history of the company. It started in 1999 with 12,000 policies. Until 2007, United Insurance limited all its operations in Florida. Starting 2008, the growth in Florida started to slowdown mostly due to the Great Recession; therefore, the company decided to expand to other states. In 2010, United Insurance expanded to South Carolina, followed by Massachusetts next year and Rhode Island in the following year.

2012 was a year of great transition for the company. During this year, the company changed some of its executives including the CEO. The current John Forney joined the company in 2012 after serving at Raymond James as a managing director. Prior to this role, Mr. Forney took some consulting roles where he advised several state government agencies as well as large insurance companies like State Farm and Allstate (NYSE:ALL) regarding property catastrophe risks. Bradford Martz the CFO, Jay Williams the VP of Marketing and John Langowski the VP of Claims also joined the company last year after leading successful careers elsewhere. These executives are expected to take the company to a new level.

As you can see in the charts below, a great majority of premiums-in-force come from homeowners insurance. Furthermore, 87% of all policies in force come from Florida whereas 8% come from South Carolina, 3% come from Massachusetts and 2% come from Rhode Island. Considering that the company has been serving clients in Florida for 14 years, in South Carolina for 3 years, in Massachusetts for 2 years and Rhode Island for 1 year, this makes perfect sense. There is a lot of room for the company to grow in these three states and it can always expand its business to additional states as well.

Since the first quarter of 2011, the earned premium has been rising consistently in every quarter. Cumulatively, the company's earned premiums rose from $151 million to $241 million in the last 2 years, which implicates a growth rate of nearly 60%.

In the last few years, United Insurance's book value and equity have been rising almost relentlessly. The investors that have stayed with the company through the difficult days have been rewarded generously (especially if they initiated or increased their positions in 2008 or 2009). Between 2008 and the end of 2012, the company's book value per share jumped from $3.31 to $5.70. In the third quarter, the book value even passed $6.00 but it fell slightly afterwards. Currently, the company's current book value is $6.20 which is very close to its share price of $6.70. The group equity is pretty close to $100 million, which happens to be the company's current market cap.

Probable Maximum Loss (PML) is the value of the biggest possible loss that could be a consequence of a disaster. This determines the premium that insurance companies could charge to its clients because this is a direct estimate of a risk these companies are taking. Because of high house values (excluding years between 2008 and 2010) and frequency of hurricanes, Florida tends to have a high PML value. The map/figure below shows the states where United Insurance operates as well as the states it has the potential to expand to. Most of the states where the company has an expansion potential enjoy much lower risk than Florida. If United Insurance has been successful in Florida, it will be much easier for the company to be successful in areas where there is less risk. Keep in mind that possible premiums in the low-risk states are likely to be low too.

In 2011, 7.89 million premiums were written in Florida where United Insurance enjoys a market share of 2.18%. In South Carolina, United Insurance enjoys a market share of 0.65% and there were 1.31 million premiums written. The number was smaller in Massachusetts and Rhode Island where the company's market share is at or below 0.01%. The rest of the states shown in the chart below (New Jersey, North Carolina, New York, Connecticut and Texas) are the candidates for the company's next expansion. Looking at the market sizes, Texas and New York look like two good candidates for the company's further expansion.

United Insurance seems to keep a large portion of its securities in cash. The second largest security holding of the company is made up of corporate debt which is followed by the US Government and agency securities which is followed by local government securities. The company has some exposure to common stocks and preferred stocks, but the exposure is limited to companies that are rated "buy" by agencies like S&P. Historical investment returns are around 5% which is pretty conservative.

While the total insured value and policies in force have been increasing in value since 2010, the annual loss to premium in force ratio has been falling rapidly. This shows me that the company has been either very lucky (consistently) or it's getting better at risk management.

In 2012, United Insurance earned $9.7 million, up from $8.1 million in 2011 (a growth of 19.76%). Given the company's market cap of $100 million, investors are looking at a P/E ratio of 10 which is pretty low for a growth company.

Keep in mind that there are a lot of serious risks that are associated with investing in this company. First, small cap stocks will always have more volatility and they will be more open to manipulation. Second, a great majority of this company's business comes from Florida where house prices have been very volatile in the last decade (not to mention unpredictability of the hurricane seasons). If there aren't any major disasters or disruptions, we are looking at a great growth story. Just keep the associated risks in mind when investing in this company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.