United Insurance Holdings: Bullish Trends In Core Business

Summary

• Q4 numbers adversely hit by elevated levels of CAT activity.
• Expense ratio and combined ratios improving when we exclude CAT.
• Dividend remains sustainable. Shares looks attractive here as they are trading under book value.
• Looking for a portfolio of ideas like this one? Members of Elevation Code get exclusive access to our model portfolio. Learn More »

If we look at a long-term chart of United Insurance (NASDAQ:UIHC)(catastrophe exposed property insurance), we can see that the MACD indicator is very close to giving a buy signal and a very attractive one in that. We state this of how oversold the indicator is at present. The best buy signals are invariably when the crossover occurs some distance from the “zero line” (which is what we have at present). The MACD is a good read on both momentum and trend and the long-term chart gives the signal more significance in our opinion.

We state this because shares have been making higher highs for four months now (after bottoming late last year) and only now are we seeing the indicator register a change in trend and momentum. Shares have comfortably broken through their 10-month average and the monthly histogram has finally moved into positive territory for the first time in over two years. Suffice it to say, the technicals are attractive at present which has piqued our interest here.

What though of the fundamentals? At present, the company pays out a forward dividend of $0.24 which equates to a dividend of 3.35% based off the current share-price. The state of the dividend is a good place to start as the key financial metrics which make up the dividend are found across all three of the financial statements. First though, we will look to how earnings have been trending recently.

Although fourth quarter earnings missed consensus by quite a margin, the market seems to be pricing in more favourable conditions going forward. The bottom-line loss came in at -$1.35 per share due to the elevated level of CAT activity which was not seen for many years. Therefore, investors should be really zoning in on the core business because the fourth quarter (and 2020 also) is not likely to be repeated for many years to come. If we go to the core income by excluding the catastrophe allowance, UIHC actually posted a profit in Q4 ($0.08).

This was a resounding increase (+$0.42) over the same period of 12 months prior. In fact, based off core earnings, sequential increases have been the order of the day for quite some time now and the market is obviously pricing this trend in. The bullish trend in core income can be confirmed through the decreasing combined ratio (88.9%) as well as underlying loss ratio (22.8%).

In fact, if we look at the chart below, we can see that the company´s gross expense ratio of 25.7% as well as the above-mentioned underlying loss ratio of 22.8% have not been at these levels for quite some time. Suffice it to say, UIHC is doing well in the areas it can control. The company will continue to double down in these areas such as reducing CAT retention as well as reducing exposure in personal lines

Source: Company Presentation

With respect to the dividend over a trailing average, coming into the fourth quarter, UIHC generated $71 million of free cash flow of which $10 million approximately was paid out in dividends. The company´s strong track record with respect to top-line growth has enabled management keep the balance sheet in check which is crucial. In the third quarter, the debt-to-equity ratio came in at 0.35. Furthermore, earnings are expected to bounce back aggressively this year which is bullish for the dividend.

Considering the above trends, we would expect some type on mean to the reversion event with respect to the company´s valuation over time. At present, shares are trading with a book multiple of 0.8. The average book multiple UIHC has reported over the past 12 years comes in above 1.2. This metric shows clear under-valuation especially when we factor in the strong double digit growth rate in sales since the company went public.

From our viewpoint, UIHC definitely presents potential and plenty of potential because shares are optionable and it is a low priced stock. Therefore, if we deem volatility to be high enough, we could potentially sell calls against any long stock positions in order to reduce our risk even more.

Therefore, to sum up, there are a lot of moving parts in UIHC at present but management continues to execute in areas which it has control. This means it will continue to increase premiums where possible and move more and more into the higher-margin mainstay commercial property business. The most near-term priority though is to reduce CAT retention. We look forward to continued coverage.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UIHC over 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.