E Upside With United Insurance

United Insurance trailing twelve-month profit margin is at 14.64% and operating margin is 23%; both are better than industry normal ratios. ROE is 19% and paid $0.17 in the last twelve months.

If every thing looks good, why it is trading lower?

Last quarter United Insurance's net revenue was $82 million, compared with $67.5 million in the first quarter of the prior year,  but it had unusual expenses, almost double that of the previous year, and barely made penny a share in net profit. The primary reason for the losses was due to winter storm affecting the Northeastern United States during the first quarter. As per the company quarterly meeting this is an abnormal and unusual event. As per their statistics it is a fifth sigma event from the normal. Black swan events do happen, they don’t have anything to do with statistics but it is part of the insurance business. Assuming this is an unusual event, the normal business process should pick up in the later part of the year. The operating cash flow in the first quarter was $18.8 million versus $17.1 million during first quarter of the prior year. Management has been very effective in growing sales and expanding business beyond their Florida base.  Judging by their past history United Insurance should come back to normal earnings second quarter onwards since no warnings were posted by the business since last quarter.

Other Risks

As an investor one should look into United Insurance's asset base. United Insurance declares in assets as available for sale. These securities neither belong to held-for-trading nor held-to-maturity. These securities are reported at fair value on the balance. Realized gains or losses are reported on income statement along with dividend and interest income. Unrealized gains/losses are excluded from income statement and included in shareholders' equity.

As of end of the first quarter, $409 million of assets were held under available for sale; out of that, $370 million assets were invested in fixed income. This will have impact on shareholders equity if interest rates start creeping up from the zero interest rate environment. As interest rates go up, fixed income securities decline in value. The longer the duration in the bonds, the more they could lose. As per the company's annual statement, 90 percent of its fixed income securities are due in less than 10 years.  So 100 basis points increase in interest rates could potentially reduce United Insurance asset value to $13.5 million, and a 300 basis point rate hike could damage $41 million in asset values.

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Disclosure : Long on United Insurance (UIHC). Owned in personal and client portfolios.

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