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HCI Group (HCI) to Buy United Insurance's 3 Personal Lines Arms

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HCI Group Inc. (HCI - Free Report) has agreed to acquire United Insurance Holdings Corp.’s (UIHC - Free Report) personal lines insurance business in the states of Georgia, North Carolina, and South Carolina. These businesses together represent about $90 million of annual premiums. This transaction reinforces this Zacks Rank #3 (Hold) HCI Group’s growth strategy to expand into new geographies.

Pursuant to the transaction agreement, HCI Group will provide 85% quota share reinsurance on all in-force, new and renewal policies of United Property and Casualty Insurance Company (“UPC”) in the Southeast from Dec 31, 2021 through May 31, 2022. UPC will receive a provisional ceding commission of 25% of the premium earned during the term of the contract that could increase up to 32% depending on the direct loss ratio results for the reinsured business. Net ceding commissions are expected between $8.3 million and $10.6 million, given an estimated ceded earned premium of $33.3 million (85% of $39.2 million).

The agreement also entails HCI Group to pay UPC a catastrophe allowance equal to 9% of the premium earned, which is expected to be $3 million for the contract period.

UPC will give renewal rights of personal lines business in Georgia, North Carolina and South Carolina to HCI Group for an up-front cash payment of $3.8 million (which will be adjusted based on the amount of premium transitioned to HCI Group, subject to a maximum of $6 million).

This transaction thus enables United Insurance to intensify its focus on its growing commercial specialty property portfolio.

Earlier this year, United Property & Casualty Insurance Company agreed to transition its personal lines business in four New England states, representing approximately $125 million of annual premiums to HCI Group.

Shares of HCI Group have rallied 71.6% year to date, outperforming the industry's increase of 13.2%. Well-performing Homeowners Choice and TypTap coupled with conservative reserving practice should continue to drive HCI Group.

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Given the insurance industry’s adequate capital level, players like Stewart Information Services Corporation (STC - Free Report) and Arthur J. Gallagher & Co. (AJG - Free Report) are pursuing strategic mergers and acquisitions.

Stewart Information has acquired Devon Title Agency to expand in Michigan. STC has a sizeable merger and acquisition pipeline and boasts a strong balance sheet with $585 million over  regulatory requirements and $74 million on an existing line of credit facility supporting growth initiatives. Stewart Information remains focused on improving operational efficiencies by adding scale, investing in priority markets and strengthening core business with real estate technology and services.

Arthur J. Gallagher & Co. acquired Tave Risk Management, LLC. Arthur J. Gallagher boasts an impressive inorganic story. AJG’s merger and acquisition pipeline is quite strong with about $400 million revenues associated with nearly 50 term sheets either agreed upon or being prepared. The insurance broker estimates more than $2.5 billion for mergers and acquisitions consisting of $1 billion in cash, about $650 million of net cash generation in the second half of 2021, and $600 million to $700 million of borrowing capacity.

Shares of Stewart Information and Arthur J. Gallagher have gained 55.6%, and 32.9%, respectively, year to date while that of United Insurance lost 26%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.